European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilized to assuage concerns about printing money, two central bank officials briefed on the plan said.
Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.
The euro jumped half a cent on the report and traded at $1.2611 at 5:40 p.m. in Frankfurt. European stocks advanced. An ECB spokesman referred to an Aug. 20 statement in which the Frankfurt-based central bank said it was misleading to report on decisions that haven’t been taken yet.
Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in the fragmented euro-area economy and ensure the survival of the common currency. Policy makers are deliberating on the plan today and Draghi will announce whether it has been agreed to at a press conference tomorrow.
“For the moment, the focus really is on the word ‘unlimited,’ which, if indeed affirmed by Draghi at tomorrow’s meeting, would constitute a new step in the ECB’s rhetoric,” said Thomas Costerg, an economist at Standard Chartered Bank in London. That would “send a powerful signal to the market.”
The report on Draghi’s bond plan prompted currency, equity and bond markets to rally.
Spanish 10-year bonds advanced for a third day, with yields dropping 16 basis points to 6.41 percent. Similar Italian yields lost 14 basis points. U.S. Treasury yields rose from almost one-month lows, Turkey’s lira gained and the pound climbed.
The officials said policy makers are likely to adopt Draghi’s proposal, with Germany’s Bundesbank remaining the sole objector. At the same time, one said Draghi’s relationship with Bundesbank President Jens Weidmann remains relaxed, and the two men only disagree on whether risks inherent in the bond plan are likely to materialize.
To sterilize the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the program has a neutral impact on the money supply.
At the moment, the ECB mops up the impact of its mothballed bond-purchase program by offering banks weekly term deposits that currently return 0.01 percent.
With the central bank’s deposit rate at zero and the euro-area banking system currently awash in about 800 billion euros ($1 trillion) of excess liquidity, a larger bond program may not present the ECB with a major obstacle.
While the ECB doesn’t expect to have to spend large sums of money on bonds, Draghi’s plan calls for no limits to be set, two of the officials said. The ECB also won’t have seniority on any bonds it buys, they said. No yield-spread targets or bands will be set publicly, they said. Two said targets won’t be set internally either and that interventions will be discretionary.
Draghi will stress conditionality of the program tomorrow, with the ECB likely to stop buying the bonds of any government that fails to meet the conditions it agrees to when it signs up for aid from Europe’s rescue fund -- a precondition for ECB action -- two of the people said. Another proposal is for the ECB to sell the bonds it has bought if a country doesn’t comply with the conditions, two of the officials said.