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European Central Bank Leaves Rates Unchanged at 0.75% Central Bank Sets Bond Plan Meant to Ease Euro Debt Peril
(35 minutes later)
FRANKFURT — The European Central Bank said Thursday it had agreed on a framework for buy the bonds of troubled euro-zone countries on the open market in unlimited quantities, but left the timing unclear. FRANKFURT — The European Central Bank said Thursday it had agreed on a framework for buying the bonds of troubled euro-zone countries on the open market in unlimited quantities, but left the timing unclear.
And so, as many analysts had warned, there will be no immediate help for countries like Spain, that are hoping E.C.B. intervention in the bond markets could reduce their borrowing costs. The euro zone’s troubled countries want such relief in order to pay down their debts and get their economies moving again after two years of crisis.
In essence, Mr. Draghi left the next step to the beleaguered governments. They would be required to ask the E.C.B. formally to begin buying their bonds in the open market and would have to agree to follow detailed conditions for paying down their debt and hewing to fiscal discipline. It would be up to the E.C.B. to determine whether the terms of the agreement were acceptable, and whether the government was meeting those conditions over time.
A bond-buying program by the E.C.B. has been the subject of deep dispute, especially among Germans who remain fearful that such a strategy runs contrary to the bank’s mandate to control inflation and would falsely prop up the weakest countries in the currency zone.A bond-buying program by the E.C.B. has been the subject of deep dispute, especially among Germans who remain fearful that such a strategy runs contrary to the bank’s mandate to control inflation and would falsely prop up the weakest countries in the currency zone.
“We assure that we are acting within in our mandate,” the E.C.B. president, Mario Draghi, said at a press conference in Frankfurt.“We assure that we are acting within in our mandate,” the E.C.B. president, Mario Draghi, said at a press conference in Frankfurt.
As many analysts had warned, there will be no immediate help for countries, like Spain, that are hoping E.C.B. intervention in the bond markets could reduce their borrowing costs. The euro zone’s troubled countries want such relief in order to pay down their debts and get their economies moving again after two years of crisis.
In essence, the bank left the next step to the beleaguered governments. They would be required to ask the E.C.B. formally to begin buying their bonds in the open market and would have to agree to follow detailed conditions for paying down their debt and hewing to fiscal discipline. It would be up to the E.C.B. to determine whether the terms of the agreement were acceptable, and whether the government was meeting those conditions over time.
Mr. Draghi did not give an exact starting date for the bond purchase program, but said that it would be determined following a thorough assessment by the bank.Mr. Draghi did not give an exact starting date for the bond purchase program, but said that it would be determined following a thorough assessment by the bank.
The E.C.B. also announced it would hold interest rates at their record-low level of 0.75 percent.The E.C.B. also announced it would hold interest rates at their record-low level of 0.75 percent.
The bank has cut its main interest rate three times since Mr. Draghi became president in November, but he and other central bank officials have complained that market interest rates have remained stubbornly high in the countries most desperately in need of credit.The bank has cut its main interest rate three times since Mr. Draghi became president in November, but he and other central bank officials have complained that market interest rates have remained stubbornly high in the countries most desperately in need of credit.
Small companies in Spain and Italy pay more than 2 percentage points more for loans than their German counterparts, according to E.C.B. data. The higher interest rates make it even more difficult for companies to invest and for those economies to recover.Small companies in Spain and Italy pay more than 2 percentage points more for loans than their German counterparts, according to E.C.B. data. The higher interest rates make it even more difficult for companies to invest and for those economies to recover.
The bond-buying strategy could prevent borrowing costs for countries like Italy and Spain from becoming too high for the governments to afford. But bond buying is also designed to help companies, because market interest rates tend to track the rates paid by governments.The bond-buying strategy could prevent borrowing costs for countries like Italy and Spain from becoming too high for the governments to afford. But bond buying is also designed to help companies, because market interest rates tend to track the rates paid by governments.
“A monetary policy signal, for example the one that the E.C.B. made in July with an interest rate cut, has only a modest impact or no impact at all in the real economy,” Jörg Asmussen, a member of the executive board of the E.C.B., said in Frankfurt on Tuesday.“A monetary policy signal, for example the one that the E.C.B. made in July with an interest rate cut, has only a modest impact or no impact at all in the real economy,” Jörg Asmussen, a member of the executive board of the E.C.B., said in Frankfurt on Tuesday.
Investors have been eager to hear more details about how the E.C.B. will intervene in bond markets — for example, whether the bank will continue to treat itself as a preferred creditor that, in the event a country defaulted, would insist on getting paid before anyone else. That detail was not forthcoming in Thursday’s statement. Mr. Draghi also said the bank would not continue to treat itself as a preferred creditor that, in the event a country defaulted, would insist on getting paid before anyone else.
Mr. Draghi said that the vote on the bond-buying program was not unanimous, but he refused to name the one dissenting vote, telling reporters coyly, “It’s up to you to guess.” He said that the vote on the bond-buying program was not unanimous, but he refused to name the one dissenting vote, telling reporters coyly, “It’s up to you to guess.”
Jens Weidmann, president of the Bundesbank, has warned that euro zone governments could become addicted to E.C.B. support for their debt, who had vocally expressed his disagreement with Mr. Draghi’s proposal ahead of Thursday’s meeting. Jens Weidmann, president of the Bundesbank, has warned that euro zone governments could become addicted to E.C.B. support for their debt, and had vocally expressed his disagreement with Mr. Draghi’s proposal ahead of Thursday’s meeting.
Even if Mr. Weidmann is a lone voice on the 23-member governing council, he heads the central bank of the largest euro zone country. He is likely to have pushed hard to limit the bond buying and his dissent could raise doubts about how decisively the E.C.B. will act to contain market interest rates. Even if Mr. Weidmann is a lone voice on the 23-member governing council, he heads the central bank of the largest euro zone country. He is likely to have pushed hard to limit the bond buying, and his dissent could raise doubts about how decisively the E.C.B. will act to contain market interest rates.
Within minutes of the announcement, members of Germany’s liberal Free Democrats party, coalition partners in Chancellor Angela Merkel’s government, warned the E.C.B. that it was risking its credibility by launching the bond buying program.Within minutes of the announcement, members of Germany’s liberal Free Democrats party, coalition partners in Chancellor Angela Merkel’s government, warned the E.C.B. that it was risking its credibility by launching the bond buying program.
“We view with great concern that the mandate of the E.C.B. is increasingly endangered,” Rainer Brüderle, the party’s parliamentary leader told reporters, the German news agency, DPA reported. He said it risked taking pressure off of the countries in crisis needed to push them to carry out necessary changes to return to competitiveness.“We view with great concern that the mandate of the E.C.B. is increasingly endangered,” Rainer Brüderle, the party’s parliamentary leader told reporters, the German news agency, DPA reported. He said it risked taking pressure off of the countries in crisis needed to push them to carry out necessary changes to return to competitiveness.
The E.C.B. has already indicated that it will concentrate on buying bonds that mature within two or three years, rather than longer-term bonds. And the E.C.B. will only support governments that have asked for help from the European Union rescue fund and agreed to conditions in return.The E.C.B. has already indicated that it will concentrate on buying bonds that mature within two or three years, rather than longer-term bonds. And the E.C.B. will only support governments that have asked for help from the European Union rescue fund and agreed to conditions in return.
“The process of agreeing the design of the program has been more tortuous than the market might have hoped when President Draghi first unveiled his plan in London on 26th July,” economists at Royal Bank of Scotland wrote in a note to investors ahead of the rate decision.“The process of agreeing the design of the program has been more tortuous than the market might have hoped when President Draghi first unveiled his plan in London on 26th July,” economists at Royal Bank of Scotland wrote in a note to investors ahead of the rate decision.
Melissa Eddy reported from Berlin.Melissa Eddy reported from Berlin.