Draghi Is Ready To Buy Bonds

 |  Includes: FXE
by: Dean Popplewell

By Dean Popplewell

European Central Bank President Mario Draghi said the bank is ready to start buying government bonds as soon as the necessary conditions are fulfilled, putting the onus on Spain to decide whether it wants a bailout.

The ECB is ready to undertake Outright Monetary Transactions “once all the prerequisites are in place,” Draghi said today at a press conference in Ljubljana, Slovenia, after policymakers left the benchmark rate at a historic low of 0.75 percent. The plan has “helped to alleviate tensions over the past few weeks” and “now it’s really in the hands of governments.”

A month after Draghi unveiled the unprecedented bond- purchase plan to lower yields on government debt, Spain, the country most likely to take up the offer, is still mulling whether it wants to accept the conditions attached. At the same time, the euro-area economy probably entered a recession in the third quarter as the sovereign debt crisis damped spending and investment.

“With the OMT, the ECB has tackled and exorcised fears of an imminent eurozone break-up,” said Carsten Brzeski, senior European economist at ING Group in Brussels. With governments now under pressure to act, “for the time being, the ECB can lean back, watch and twiddle thumbs.”

No Rate Cut?

The euro extended gains as Draghi spoke, rising to $1.2992 for a 0.7 percent advance on the day. Separately, the Bank of England held its bond-purchase target at 375 billion pounds ($603 billion) today and kept its key rate at 0.5 percent.

Under Draghi’s OMT plan, a country must make a formal request to Europe’s bailout fund to buy its debt on the primary market before the ECB considers buying bonds on the secondary market. Spanish Finance Minister Luis de Guindos has said officials are still considering whether they need European Union aid.

While bond markets have rallied since Draghi pledged on July 26 to “do whatever it takes” to preserve the euro, Spanish bonds fell for a second day today as the nation sold 3.99 billion euros ($5.2 billion) of two-, three- and five-year securities. Spain sold three-year notes at an average yield of 3.956 percent, up from 3.845 percent at the previous sale on Sept. 20.