Draghi Told Lawmakers ECB Can Buy Three-Year Bonds, MEP Says

European Central Bank President Mario Draghi
Mario Draghi, president of the European Central Bank (ECB). Photographer: Hannelore Foerster/Bloomberg

European Central Bank President Mario Draghi told lawmakers he would be comfortable buying bonds with maturities of up to about three years, said Jean-Paul Gauzes, a member of the European Parliament.

Purchasing short-dated bonds doesn’t constitute state financing, Draghi said during a closed-door parliamentary session in Brussels today, Gauzes told reporters afterwards. “He thinks it’s not a violation of the treaty and you can do it under the current legal framework,” said Gauzes, a French Christian Democrat. “He said for example three years is ok, 15 years no.”

The euro rose against the dollar after the comments, which indicate Draghi may be in a position to announce details of the ECB’s new bond-purchase program after policy makers meet on Sept. 6. The European currency jumped more than a quarter of a cent to $1.2611 and traded at $1.2599 at 7:27 p.m. in Brussels, up 0.2 percent on the day.

Draghi said on Aug. 2 that the ECB was working on a bond-buying program to lower yields in countries such as Italy and Spain as long as they also ask Europe’s rescue fund to buy their debt. Germany’s Bundesbank opposes government bond purchases and the country’s constitutional court won’t rule on the legality of the permanent fund, the European Stability Mechanism, until Sept. 12.

Closed-Door Meeting

Sven Giegold, a German Green member of the European Parliament who attended the closed-door meeting with Draghi, said he left it with the impression that the ECB will renew intervention in bond markets to stem the debt crisis. The ECB shelved its previous purchase program earlier this year.

“I assume after this meeting that there will continue to be intervention on the secondary market,” Giegold told reporters. He declined to elaborate on the talks with Draghi about this issue, citing their confidentiality.

Giegold also said Draghi spoke out against giving the ESM a banking license on the grounds that such a step would entail monetary financing of governments.

Draghi hasn’t specified exactly what maturities of bonds the ECB might buy. He said last month that the ECB’s purchases would focus on the shorter part of the yield curve because “this falls squarely within the range of classical monetary-policy instruments.”

Money-Market Operations

“The shorter the spectrum, the closer it is to money-market operations,” Draghi said then. While the ECB has provided banks with three-year loans, “in normal operations maturities like the ones we are operating on right now can go from six months to nine months to a year,” he said.

In answer to a question about banking union proposals to be unveiled on Sept. 12, Draghi raised the possibility of dividing lenders into categories to better identify which ones might need a higher degree of central supervision, according to Pervenche Beres, a French socialist member of the committee. Draghi indicated such a division of oversight between the ECB and national regulators, was one of several options for how the future system might work, Beres said.

European Union Economic and Monetary Affairs Commissioner Olli Rehn told the committee in a separate session that the ECB should have “prime responsibility” for bank oversight with national regulators continuing with an “important role in the system.”

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