Josephine Moulds guardian.co.uk,
Thursday 6 September 2012 14.48 BST


The ECB's Mario Draghi has announced that the central bank will buy eurozone governments' bonds in unlimited amounts.

Mario Drghi, the president of the European Central Bank, has pushed through a controversial scheme to save the euro, trampling over German opposition.

Stock markets on both sides of the Atlantic rallied strongly after the ECB announced that it was prepared to buy unlimited quantities of government bonds to help Europe's struggling periphery, as long as countries agreed to economic reform plans in return.

At the same time, the ECB said that the economic outlook for the eurozone had deteriorated. It now expects the eurozone economy to shrink by 0.4% in 2012 and grow by 0.5% in 2013, while inflation rises to 2.6%.

Draghi said the vote to start buying the bonds of crisis-hit states in unlimited amounts, in an attempt to bring governments' borrowing costs down, was "almost unanimous", with one exception.

The scheme has faced furious opposition from German central bank chief Jens Weidmann, who argues that it is tantamount to printing money in order to pay off a country's debt, which is expressly forbidden by the ECB's mandate. He also fears the measures will fuel inflation, ease the pressure on overspending governments to get their finances in order and erode the ECB's independence.

Ranvir Singh, chief executive of market analysts RANsquawk, said: "Even by the inscrutable standards of Mario Draghi, the ECB president's speech revealed little of huge tectonic pressure that has built up under the eurozone's surface. To fly in the face of Germany's wishes will not have been easy. For the Bundesbank, keeping inflation in check is an article of faith. Its president has made no secret of the fact that he regards the ECB plan to buy the debt of the eurozone's weaker members as the road to perdition."

Draghi said the buying-up of bonds, which will be known as outright monetary transactions (OMTs), would be unlimited and that countries benefiting from the scheme would need to submit to certain conditions. The ECB would seek the involvement of the IMF to design and monitor such programmes. Governments to benefit from the OMT would also have to be attached to a programme with one of the eurozone bailout funds. Draghi said the ECB would stop buying a country's bonds if it failed to comply with the bailout programme.

News of the plan sparked a rally in Spanish and Italian government bonds. Equities also strengthened. In London the FTSE 100 was up by more than 2% in late trading, gaining 119 points to 5777, while the Spanish IBEX surged by nearly 5%. On Wall Street, the Dow Jones rallied by 230 points, or 2.1%, to 13276.

The ECB said it would buy bonds with a residual maturity of one to three years. That means it can buy bonds with a longer maturity, as long as they only have three years remaining until they are paid back.

As expected, the ECB said the bond-buying programme would be "sterilised". This means the central bank will not increase the money supply as a result of the bond purchases; instead it will take the equivalent amount of money out from other parts of the system.

http://www.guardian.co.uk/business/2012/sep/06/eurozone-crisis-ecb-unlimited-bond-buying