ECB Said to Await German ESM Ruling Before Settling Plan
European Central Bank President Mario Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said.
With the court set to rule on Sept. 12, investors looking for Draghi to announce a definitive purchase program at his Sept. 6 press conference might be disappointed, according to the officials, who spoke on condition of anonymity because the deliberations are not public. The program is still being worked on and staff may not be able to finalize it by then, said the officials, who are familiar with thinking on the ECB Governing Council. An ECB spokesman in Frankfurt declined to comment.
Draghi announced on Aug. 2 that the ECB may intervene in the secondary market to reduce bond yields in countries such as Spain and Italy if they apply to Europe’s bailout fund for aid and accept the conditions attached. The European Stability Mechanism, intended to replace the temporary European Financial Stability Facility, hasn’t entered into force yet as legal wrangling over its compatibility with the German constitution continues.
While Draghi is likely to give a progress report on the bond plan after the Sept. 6 rate decision, the ultimate design of the ECB’s program may depend on the uncertainty over the permanent bailout fund being resolved, so the officials said it makes sense to wait for the German ESM court ruling.
Full details of the ECB’s plan could be a month away, they said. While the Bundesbank opposes ECB bond purchases, it expects to be outvoted, one of the officials said.
German 10-year bund yields reached a three-week low and Spanish and Italian two-year yields rose after the story was published. The euro extended its decline, snapping four days of gains to trade at $1.2510 at 4 p.m. in Frankfurt, down 0.4 percent today.
“It’s becoming clearer by the day that a number of legal and political pieces need to fall into place before the ECB decides to participate in any bond-buying program,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy Ltd. in London. “While Mr Draghi clearly raised expectations, he has been at pains to point out the conditions that need to be satisfied before any intervention occurs.”
Draghi said on Aug. 2 that ECB working groups would design a bond purchase program “over the coming weeks,” fueling speculation that he would unveil the plan after the bank’s next policy meeting.
Bond markets rallied after Der Spiegel magazine reported on Aug. 19 that the ECB would decide at its September policy meeting whether to impose a cap on borrowing costs for countries including Italy and Spain.
The ECB took the unusual step of responding to that article, saying in a statement that the Governing Council hadn’t discussed the plan and it was “absolutely misleading to report on decisions which have not yet been taken.”
Germany’s Constitutional Court is deciding whether to suspend the 500 billion-euro ($627 billion) ESM following lawsuits by German lawmakers, academics and political groups who say the fund contravenes domestic law. If the start of the ESM is delayed further, crisis managers would have to get by with the 240 billion euros left in the temporary EFSF.
German Finance Minister Wolfgang Schaeuble warned on July 10 that a delay in activating the ESM could lead to a “significant worsening of the debt crisis.”
Draghi’s bond-buying plan hinges on the government-backed bailout funds acting first, which would require countries to make a formal request for aid and to sign up to conditions in a Memorandum of Understanding. Neither Spain nor Italy has made such a request.
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