All eyes were on the European Central Bank to come up with new measures to cure the eurozone’s debt crisis Thursday, as German Chancellor Angela Merkel headed to recession-mired Spain for talks.
ECB chief Mario Draghi is widely expected to unveil the details of a new bond-buying scheme — a revamped version of its much-contested Securities Market Programme (SMP) — following the regular monthly policy meeting of the bank’s governing council in Frankfurt.
Spanish Prime Minister Mariano Rajoy is hoping the central bank will embark on unlimited bond purchases to help bring down his country’s crippling high borrowing costs, which he argues are unjustified.
‘The risk premia are not the result of Spain’s economic fundamentals, but due to doubts about the euro,’ Rajoy told the daily Frankfurter Allgemeine Zeitung in an interview.
The risk premium, or spread, is the difference between what Spain has to pay for loans on the open market and what Germany, the eurozone’s most stable economy, has to pay.
In recent days Spain’s position has deteriorated, with the spread widening to a whopping 5.5 percentage points.
‘Everyone understands that it is difficult to steer an economy onto a path of growth without an adequate level of interest levels. This is currently extraordinarily difficult for a number of eurozone countries,’ Rajoy said.
Spain’s reform efforts should be taken into account and the country must be given a chance to press ahead, he argued.
‘The risk premia and interest-rate differentials are negating all our efforts,’ Rajoy insisted.
ECB watchers warn markets could be disappointed if they expect Draghi to announce an immediate roll-out of new bond purchases after the SMP has lain dormant for most of this year.
SMP was launched in May 2010 to help debt-wracked eurozone countries that were finding it difficult to drum up financing in capital markets and has since accumulated 208.5 billion euros ($260 billion) in bonds from Greece, Ireland, Portugal, Italy and Spain as part of the programme.
But it has come under fierce opposition, not least in Germany, where critics argue the scheme is tantamount to monetary financing, where the central bank prints money to pay off a country’s debt.
That is expressly forbidden under the ECB’s statutes.
‘It’s important to have principles in life. But sometimes it’s good to be flexible,’ Rajoy countered.
‘Orthodox thinking is very good. But it’s not all black and white. Sometimes it’s the grey tones that help solve a problem.’
Media reports suggest that the ECB’s revamped bond-buying programme — apparently termed Monetary Outright Transactions or MOOT — will not entail setting public yield caps as some players had speculated.
Yield caps are pre-set ceilings above which the ECB would automatically start buying bonds.
The scheme would also be subject to strict conditions.
Countries wishing to benefit would have to request a bailout from one of the eurozone’s rescue funds, the EFSF or the ESM, to ensure they continue their reforms.
And Draghi has signalled that the ECB would limit the eligible maturities to a maximum of three years.
Rajoy is set to welcome the German chancellor in Madrid later Thursday where talks are likely to centre around the euro crisis amid speculation Spain might soon request a full sovereign bailout.
Spain’s outlook is clouded by high borrowing rates, as well as recession, a jobless rate of nearly 25 percent and a financial crisis that led to a 100-billion-euro eurozone rescue for banks.
Ahead of Merkel’s trip, her spokesman praised Spain’s austerity measures, saying Berlin was convinced reforms would soon lead to better days.
‘The federal government is firmly convinced in fact that what the Rajoy government is doing is suitable to bring the country on to a better path over the long term,’ Steffen Seibert told a regular government briefing on Wednesday.