ECB Bond Buying - Not A Matter of If, But When and How

In an opinion piece for the Germany weekly Die Zeit, ECB President Mario Draghi wrote that the ECB will continue to do what is necessary to “ensure price stability” – which is the ECB’s one and only mandate. However, the ECB President pointed out that fulfilling this mandate sometimes requires it to go beyond standard monetary policy tools. And to market analysts, this seems to be yet another sign that another round of bond buying from the ECB looks to be a matter of when and not if.

The piece was posted on the ECB’s website and it is reported that the Op Ed piece contained what Draghi would have presented in Jackson Hole this week. Recall that yesterday Draghi pulled out of the Federal Reserve conference, citing a heavy workload.

The ECB President wrote, "When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole."

Adding to the view that Draghi will follow up on his promise to do whatever it takes to fight the debt crisis, Reuters reported Monday that the ECB appears to be trying to appease the fears of Germany’s Bundesbank. In the text of a speech to be delivered Tuesday in Hamburg, ECB Executive Board Member Joerg Asmussen touched on an important issue, saying the central bank intends on structuring its new bond-buying program so that it does not directly finance future government spending of Eurozone countries.

In addition, Asmussen detailed that there would be conditions attached to any future bond buying. “The ECB will only act in parallel with the European Financial Stability Facility and later the European Stability Mechanism,” he said Monday.

Finally, Mr. Asmussen reminded his listeners of the fact that Mr. Draghi has demanded those countries who are looking for aid must first make a formal request. All three points appear to be critical to receiving German support for the program.

Asmussen's comments have received a great deal of attention lately due to the fact that he is increasingly seen as the bridge between ECB President Draghi and Bundesbank President Weidmann.

According to Reuters, the new bond-buying, which is aimed at keeping rates in troubled EU countries such as Spain and Italy, would ensure countries whose bonds the ECB buys do not back away from the required reforms.

While Asmussen did not say when the bank would begin buying bonds, he did make it clear (a) the plan would go ahead despite Bundesbank opposition and (b) that the ECB would focus on short-term bond purchases.

"Under the framework of the new programme, the ECB will only buy bonds with short maturities," Asmussen said in the text of the speech. He also pointed out that that the ECB was still working on many of the operational details of the plan.

Regarding the upcoming talks at the ECB policy meeting scheduled for September 6, Asmussen said that "The whole discussion will be led by the requirement that any concerns about treaty-violating state financing are dispelled," adding that "We will only act within our mandate."

StreetAccount noted that Asmussen feels that the rise in bond yields is due to the fear that the Euro may not stay together. Asmussen recently told a German publication that the surge in peripheral yields in recent months “reflects fears about the reversibility of the euro, and thus a currency exchange risk,” rather than poor economic policies. StreetAccount further noted that “convertibility concerns and the accompanying disruptions to policy transmission have been widely cited as the rationale for ECB intervention.

The Telegraph noted this weekend that there a dispute within the ECB over the form of its new intervention program has developed. Citing a Der Speigel article, the Telegraph said that officials from countries such as Spain and Italy have pushed for unlimited ECB purchases of peripheral sovereign debt in secondary markets. However, officials from northern Eurozone countries prefer that the ECB to intervene in a "short, but energetic" way when yields "explode" to the upside.

It should be noted that the bond-buying program itself still is being opposed by the Bundesbank. Bundesbank President Weidmann reiterated his concern over ECB intervention, warning that "central bank financing can become addictive like a drug". (Sound familiar?)

However, as far as the markets are concerned, the key takeaway at this stage appears to be that the debate is now about the details of the ECB’s bond buying program and not about whether or not the program will actually come to pass.

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