European Central Bank President Mario Draghi said there’s reason for optimism in Europe after financial markets rallied on the bank’s bond-purchase plan.
“Financial conditions have been better recently, but we have to continue working on that,” Draghi said after a meeting of euro-area finance ministers in Nicosia, Cyprus, today. “If we continue going this way, one has to be optimistic.”
European Central Bank policy makers on Sept. 6 agreed on an unlimited bond-purchase program aimed at regaining control of interest rates in countries such as Spain and Italy. Under the plan, dubbed Outright Monetary Transactions, the ECB may buy bonds with a maturity of up to three years on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market.
Draghi said the bond-purchase plan provides a “fully effective backstop mechanism that is meant to remove the tail risk for the euro area.” Combined with other recent developments, “that has produced the positive effects that we’ve seen in the financial markets,” he said.
Spain’s 10-year bond yield was at 5.63 percent today, down from 6.41 percent on Sept. 5 and 7.62 percent in July. The euro rose above $1.30 yesterday for the first time in more than four months.
“Perhaps there is too much emphasis on what we have done,” Draghi said. “Many things seem to fall into the right place. There’s the recent progress on the euro-area governance” and “on pursuing the right economic policies in all euro area countries.”
Asked how much time the ECB has bought for indebted governments to implement reforms, Draghi said “it’s a very difficult question to answer. You have to ask the markets.”
Draghi stressed that the ECB’s bond program requires governments to seek aid from the rescue fund and sign up to “strict and effective” conditions.
The ECB’s aim is to “repair the monetary policy transmission mechanism, which in the financially fragmented area were not functioning,” he said. “What we see now are the first signs of a more normal working, but we still have a long way to go.”
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