Aug. 2 (Bloomberg) -- European Central Bank President Mario Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan.
ECB bond purchases would likely focus on shorter-term maturities, would be conducted in a way to soothe investors’ concerns about seniority, and wouldn’t breach European Union rules prohibiting the financing of government deficits, Draghi told reporters in Frankfurt today. ECB officials are working on the plan and details will be fleshed out in coming weeks, he said.
“Risk premia that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner,” Draghi said at a press conference after keeping the benchmark interest rate on hold at 0.75 percent. “The euro is irreversible.” There is a “severe malfunctioning” in bond markets, he said.
The euro declined and Spanish bond yields rose after Draghi’s remarks, which came after a week in which markets soared on optimism he would announce a bond-purchase plan to end the debt crisis. While Draghi’s proposals go further than the ECB’s market interventions to date, he signaled that the 23- member Governing Council has yet to reach a final agreement.
“It is clear and it is known that Mr Weidmann and the Bundesbank have their reservations about programs that buy bonds,” Draghi said, referring to the head of the German central bank.
The euro initially climbed as much as 0.5 percent to $1.2405 after Draghi’s comments before falling to as low as $1.2174. The yield on Italy’s 10-year government bond rose 23 basis point to 6.129 percent and the yield on Spain’s 10-year bond climbed 7 basis points to 6.716 percent.
“The market reacted positively when Draghi said the ECB will address the seniority issue,” said Mohit Kumar, head of European fixed income strategy at Deutsche Bank AG, Germany’s biggest bank. “But then when details emerged, it suggested he is giving guidelines without giving concrete measures, and that’s when the market went from risk-on to risk-off mode.”
Financial markets and politicians had ratcheted up pressure on the ECB to act after Draghi pledged last week to do “whatever it takes” to save a euro battered for almost three years by spiraling bond yields in countries from Spain to Greece. The Bundesbank reiterated last week that it opposes further purchases of sovereign debt by the ECB, as they blur the line between fiscal and monetary policy.
“Governments must stand ready to activate the EFSF in bond markets,” Draghi said. The central bank “may undertake outright open-market operations.”
The Federal Reserve yesterday pledged to take new policy steps as needed to promote stronger economic growth and employment. The Bank of England held its key rate at 0.5 percent and its bond-purchase target at 375 billion pounds ($586 billion).
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