Orphanides Says ECB Would Struggle to End Government-Bond Buying

Former European Central Bank Governing Council member Athanasios Orphanides said the central bank would face fierce political opposition on any decision to stop purchasing government bonds if a government fell behind on conditionality.

“The real concern for the ECB is not how to kickstart the program, it’s the exit,” Orphanides, who now teaches at the MIT Sloan School of Management in Cambridge, Massachusetts, said in a telephone interview. If an agreement is reached “with a government and it reneges on it in six months time, the ECB will face tremendous pressure not to stop its bond purchases,” he said.

Investors will be looking for clues on any progress on a Spanish aid request from ECB President Mario Draghi today. After months of lobbying from Spain and Italy, Draghi last month unveiled the details of ECB’s new bond purchase program. Under the plan, a country must make a formal request to Europe’s bailout fund to buy its debt on the primary market before the ECB considers buying bonds on the secondary market.

So far, no country has asked for aid, with Spain saying it is still studying the conditionality attached to the program.


Italian Prime Minister Mario Monti cautioned last week that aid shouldn’t hinge on more conditions than leaders already signed up to and the International Monetary Fund shouldn’t need to police it.

“It may be convenient for politicians to harp on about ECB conditionality, but people should realize that the conditionality is set via the Eurogroup and the European Stability Mechanism,” said Orphanides, who sat on the ECB’s Governing Council until May.

Trying to assuage any concerns that countries’ reform efforts will weaken as soon as bond purchases manage to bring down yields, ECB officials including Executive Board member Joerg Asmussen and Belgium’s Luc Coene have said that the central bank will immediately stop buying if a country slips on its commitments.

Still, Orphanides said it will be very hard for the ECB to follow through on that threat.

German Opposition

“As long as a government is seen as credible by the other governments and the ESM continues to buy its bonds, it will be difficult for the ECB to stop,” he said.

Orphanides also said he was surprised that German Bundesbank President Jens Weidmann was the only objector to the plan. “I would have expected more than one dissent on the Governing Council on the OMT.”

ECB officials are meeting in Slovenia today for their monthly policy meeting. The central bank will publish its decision on interest rates at 1:45 p.m. local time and Draghi will hold a press conference 45 minutes later.

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