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Draghi May Have Shelved ECB Bond Program as Loans Fuel Rally

European Central Bank President Mario Draghi
European Central Bank President Mario Draghi. Photographer: Hannelore Foerster/Bloomberg

Feb. 27 (Bloomberg) -- European Central Bank President Mario Draghi may have shelved the bank’s controversial bond-purchase program.

The Frankfurt-based ECB said today it hasn’t bought any government bonds for two straight weeks, the first pause since August. The purchases have dwindled since the ECB funneled a record 489 billion euros ($655 billion) of three-year loans into the banking system in December, fueling a bond-market rally and reducing the need to intervene with its Securities Markets Program.

“It looks like Draghi is mothballing the SMP,” said Christian Schulz, a former ECB economist now working for Berenberg Bank in London. “It has become less relevant in light of the massive loans to banks.”

Banks may be using some of the cheap cash to purchase sovereign debt, driving down bond yields and thus borrowing costs for debt-strapped euro-area governments. The suspension of the purchase program would remove a source of conflict on the ECB council that has smoldered since it began in May 2010, precipitating the resignations of German policy makers Axel Weber and Juergen Stark.

The ECB will lend banks another 470 billion euros in a second offering of three-year funds this week, according to the median of 28 estimates in a Bloomberg News survey. The loans are allotted at 11:15 a.m. on Feb. 29. The interest rate is determined by the ECB’s benchmark, which is currently at a record low of 1 percent.


“The ECB is basically subcontracting the buying of government debt to the banks,” said Thomas Mayer, chief economist of Deutsche Bank AG in Frankfurt.

Italian two-year notes surged today, pushing the yield to the least in almost 11 months, as borrowing costs fell at a sale of bills. Spanish two-year notes gained for an eighth day, their longest winning streak since December.

The ECB, which says its bond purchases are aimed solely at smoothing transmission of its interest rates on markets, has so far bought 219.5 billion euros of assets. In the three weeks before its buying ground to a halt, the ECB spent just 246 million euros. It will take seven-day term deposits tomorrow to offset the extra liquidity created, a practice it employs to ensure the purchases don’t fuel inflation.

The central bank is unlikely to declare the purchase program formally over, Schulz said. Draghi said last week the bank needs to be “careful” about announcing an end to its bond purchases as “markets are still vulnerable.”

The ECB resumed the program in August, ending a four-month hiatus after the sovereign debt crisis escalated and drove up yields in Italy and Spain.

The purchases have split its policy makers, some of whom say they blur the line between monetary and fiscal policy. Germany’s Bundesbank voted against reviving the program in August and Stark resigned from the Executive Board at the end of 2011.

To contact the reporters on this story: Gabi Thesing in London at; Jeff Black in Frankfurt at

To contact the editor responsible for this story: Craig Stirling at

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