THE EUROPEAN Central Bank (ECB) can only maintain its independence by imposing strict conditions on any bond market support for troubled governments, its president Mario Draghi insisted yesterday.
The outright monetary transactions (OMT) plan will see the ECB consider buying troubled governments’ bonds, as long as the country agrees a programme of economic reforms and asks the European Stability Fund for a bailout.
But although the ECB has not yet started buying bonds – no country has yet met the conditions – Draghi argued the proposals have already helped by reassuring markets that he stands ready to help when he is
He pointed to falling borrowing costs for the Spanish government – 10-year yields are down to 5.9 per cent, down from 6.89 per cent a month ago and 7.6 per cent in late July.
And August’s lending data showed Draghi’s earlier pledge to do “whatever it takes” to help the Eurozone had helped push down interest rates for businesses. For example loans of over €1m (£804m) with a fixed period of a decade came in at 3.01 per cent, down 49 basis points on the month.
Draghi also insisted that applying tough conditions to OMTs, rather than buying bonds immediately, is the best way to keep monetary policy independent of governments.
“Conditionality has several roles. It reduces moral hazard by governments, and will protect the independence of the ECB,” he said.
“For example one condition is the signing of a memorandum with the Euro Group, so once you have that unanimity the whole of the Eurozone is supporting the programme.”
But if a country fails to keep to the conditions, the OMT will be withdrawn. And the scheme is only available as long as credit conditions continue to be so poor as to harm the transmission of monetary policy.