KRANJ, Slovenia—European Central Bank President Mario Draghi on Thursday said the bank's new bond-buying program is ready to activate, and put the onus on vulnerable countries such as Spain to first seek and receive assistance from other euro-zone governments.
Mr. Draghi defended the bank's decision to make its new plan reliant on political decision-making in the euro bloc, saying the process gives governments the right incentives to pursue sound economic policies.
The ECB said in September that it will purchase unlimited amounts of government bonds of Spain and other euro states that face high borrowing costs, provided the countries first seek assistance from the bloc's rescue funds and agree to international oversight of their fiscal and economic policies.
"We are ready (to activate bond purchases) and we have a fully effective backstop. Now it's in the hands of governments," Mr. Draghi said after the ECB's monthly meeting, which took place outside the Slovenian capital of Ljubljana.
Thursday's meeting and news conference lacked the drama of the bank's July and August gatherings, when officials unveiled and then released details on a plan to restart bond purchases over fierce opposition from Germany's Bundesbank.
Officials kept their main policy rate unchanged at 0.75%, a record low, and announced no new measures to combat the debt crisis and deep recessions along Europe's southern tier, despite recent economic data that point to economic contraction.
"It looks like wait-and-see [on additional stimulus] unless the economy deteriorates," said Greg Fuzesi, economist at J.P. Morgan Chase.
The new program has helped calm markets, Mr. Draghi said, even though the ECB has yet to purchase any bonds.
Imbalances in the bloc's loan-settlement system have stabilized, Spain has been able to meet most of its funding needs for this year and bank deposits have flowed back into Italy, he said.
But supporters and critics of bond buying have questioned the ECB's insistence on government-approved conditions, saying it ties the ECB's hands in the event of severe financial stress and makes it too reliant on complicated and time-consuming European politics.
If countries have to wait for an official aid program, "this could lead to a situation whereby the ECB is not able to act quickly enough to reduce differences in interest rates," Angel Gurría, secretary-general of the Organization for Economic Cooperation and Development and supporter of ECB bond purchases, said in a German newspaper interview this week.
But these conditions are "an essential part" of the ECB plan, Mr. Draghi said, by reducing the risk that governments backtrack on overhauls and making their bonds more attractive to investors.
In addition, having all 17 euro members agree to aid first "is an extremely forceful ingredient" by showing Europe's unity at resolving the crisis, he said.
In September, the ECB announced a new program, called Outright Monetary Transactions or OMT, that would purchase unlimited amounts of government bonds primarily in maturities between one and three years.
Many analysts say they think this corrected a flaw of the previous bond program, which officials repeatedly said was "limited" in size.
That fueled doubts that the bank would act aggressively enough to convince investors that there was a credible backstop against financial contagion. The ECB offered additional details Thursday.
Countries under rescue umbrellas such as Portugal and Ireland won't be eligible for ECB bond buys until they regain full financial-market access.
Countries whose programs are under review would also be ineligible for ECB purchases of their bonds, Mr. Draghi said. The ECB won't take part in any rescheduling of its existing Greek bondholdings, he added.
Spanish and Italian bond yields have fallen sharply since Mr. Draghi first hinted in late July that renewed bond purchases were in the works. But markets have seesawed since late September on worries that Spain wouldn't request assistance.
Bailout politics are also complicated in creditor countries such as Germany, which are reluctant to ask parliaments to approve another round of financial assistance.
Mr. Draghi sidestepped questions on whether Spanish officials should apply for aid, saying it is up to them.
Still, he praised "significant progress" being made to clean up the country's banks and fix its economy. Deep recessions have already hit parts of southern Europe, pushing unemployment sharply higher, particularly for young workers.
Mr. Draghi called rising youth unemployment, which is above 50% in Spain and Greece, "an incredible waste of resources," and urged governments to make labor markets more flexible. The euro zone's prosperous northern core has started to show strains.
Recent business surveys suggest France's economy contracted last quarter while Germany likely posted little or no growth, analysts said. The 17-nation bloc's economy hasn't expanded as a whole since the third quarter of 2011.
But with fragmented financial markets preventing the ECB's measures from filtering through to private credit and the economy, additional rate cuts may not have much an effect. ECB data Thursday showed small businesses in Spain face sharply higher borrowing costs than their German counterparts.
Another obstacle is inflation, which unexpectedly rose in September to 2.7% from a year ago, well above the ECB's target of just below 2%.
Inflation will stay above 2% for the rest of the year, Mr. Draghi said, before falling below 2% in 2013.
The ECB head defended the bank from its German critics who say that by agreeing to purchase bonds the central bank has overstepped its anti-inflation mandate.
"If the tradition of the Bundesbank is to assure price stability, the ECB is fully in sync with that tradition," he said.
wsj.com
Mr. Draghi defended the bank's decision to make its new plan reliant on political decision-making in the euro bloc, saying the process gives governments the right incentives to pursue sound economic policies.
The ECB said in September that it will purchase unlimited amounts of government bonds of Spain and other euro states that face high borrowing costs, provided the countries first seek assistance from the bloc's rescue funds and agree to international oversight of their fiscal and economic policies.
"We are ready (to activate bond purchases) and we have a fully effective backstop. Now it's in the hands of governments," Mr. Draghi said after the ECB's monthly meeting, which took place outside the Slovenian capital of Ljubljana.
Thursday's meeting and news conference lacked the drama of the bank's July and August gatherings, when officials unveiled and then released details on a plan to restart bond purchases over fierce opposition from Germany's Bundesbank.
Officials kept their main policy rate unchanged at 0.75%, a record low, and announced no new measures to combat the debt crisis and deep recessions along Europe's southern tier, despite recent economic data that point to economic contraction.
"It looks like wait-and-see [on additional stimulus] unless the economy deteriorates," said Greg Fuzesi, economist at J.P. Morgan Chase.
The new program has helped calm markets, Mr. Draghi said, even though the ECB has yet to purchase any bonds.
Imbalances in the bloc's loan-settlement system have stabilized, Spain has been able to meet most of its funding needs for this year and bank deposits have flowed back into Italy, he said.
But supporters and critics of bond buying have questioned the ECB's insistence on government-approved conditions, saying it ties the ECB's hands in the event of severe financial stress and makes it too reliant on complicated and time-consuming European politics.
If countries have to wait for an official aid program, "this could lead to a situation whereby the ECB is not able to act quickly enough to reduce differences in interest rates," Angel Gurría, secretary-general of the Organization for Economic Cooperation and Development and supporter of ECB bond purchases, said in a German newspaper interview this week.
But these conditions are "an essential part" of the ECB plan, Mr. Draghi said, by reducing the risk that governments backtrack on overhauls and making their bonds more attractive to investors.
In addition, having all 17 euro members agree to aid first "is an extremely forceful ingredient" by showing Europe's unity at resolving the crisis, he said.
In September, the ECB announced a new program, called Outright Monetary Transactions or OMT, that would purchase unlimited amounts of government bonds primarily in maturities between one and three years.
Many analysts say they think this corrected a flaw of the previous bond program, which officials repeatedly said was "limited" in size.
That fueled doubts that the bank would act aggressively enough to convince investors that there was a credible backstop against financial contagion. The ECB offered additional details Thursday.
Countries under rescue umbrellas such as Portugal and Ireland won't be eligible for ECB bond buys until they regain full financial-market access.
Countries whose programs are under review would also be ineligible for ECB purchases of their bonds, Mr. Draghi said. The ECB won't take part in any rescheduling of its existing Greek bondholdings, he added.
Spanish and Italian bond yields have fallen sharply since Mr. Draghi first hinted in late July that renewed bond purchases were in the works. But markets have seesawed since late September on worries that Spain wouldn't request assistance.
Bailout politics are also complicated in creditor countries such as Germany, which are reluctant to ask parliaments to approve another round of financial assistance.
Mr. Draghi sidestepped questions on whether Spanish officials should apply for aid, saying it is up to them.
Still, he praised "significant progress" being made to clean up the country's banks and fix its economy. Deep recessions have already hit parts of southern Europe, pushing unemployment sharply higher, particularly for young workers.
Mr. Draghi called rising youth unemployment, which is above 50% in Spain and Greece, "an incredible waste of resources," and urged governments to make labor markets more flexible. The euro zone's prosperous northern core has started to show strains.
Recent business surveys suggest France's economy contracted last quarter while Germany likely posted little or no growth, analysts said. The 17-nation bloc's economy hasn't expanded as a whole since the third quarter of 2011.
But with fragmented financial markets preventing the ECB's measures from filtering through to private credit and the economy, additional rate cuts may not have much an effect. ECB data Thursday showed small businesses in Spain face sharply higher borrowing costs than their German counterparts.
Another obstacle is inflation, which unexpectedly rose in September to 2.7% from a year ago, well above the ECB's target of just below 2%.
Inflation will stay above 2% for the rest of the year, Mr. Draghi said, before falling below 2% in 2013.
The ECB head defended the bank from its German critics who say that by agreeing to purchase bonds the central bank has overstepped its anti-inflation mandate.
"If the tradition of the Bundesbank is to assure price stability, the ECB is fully in sync with that tradition," he said.
wsj.com
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