FRANKFURT — The European Central Bank appears increasingly willing to throw around its weight in bond markets to hold down borrowing costs for Spain — or at least wants traders to worry that it will.
[h=6]Simon Dawson/Bloomberg News[/h]Mario Draghi, the European Central Bank chief, in London on Thursday for a meeting of business leaders.
The euro and European stocks rose sharply Thursday after Mario Draghi, president of the E.C.B., said in London that the bank would “do whatever it takes to preserve the euro.”
His comments were interpreted by some to mean that the E.C.B. might resume intervening in bond markets to keep borrowing costs for Spain and Italy under control.
The E.C.B. would stay within its mandate, Mr. Draghi said in remarks at an investment conference. But he added that if government borrowing costs interfered with the central bank’s ability to influence interest rates, “they come within our mandate.”
Mr. Draghi did not explain how the E.C.B. mandate would apply in this case, but the bank's main task under its charter is to maintain price stability, which it typically does by adjusting interest rates. As it has in the past, the E.C.B. could justify bond market intervention as a way of ensuring its control over interest rates.
The E.C.B. has intervened sporadically in government bond markets since 2010 but has not bought any government bonds for several months. Both the Spanish government and the International Monetary Fund have been urging the E.C.B. to resume buying bonds. But the interventions have been opposed by the Bundesbank, Germany’s powerful central bank, which regards them as a violation of a ban on using the E.C.B. to finance governments.
The mere threat of renewed E.C.B. intervention could help push down borrowing costs for Spain and other troubled countries. Traders may not want to risk betting against the E.C.B., with its massive resources. In recent days, the effective interest rate on long-term Spanish government bonds rose well above 7 percent, to levels that could eventually make it impossible for the country to roll over its debt.
“Are the latest comments a signal that the E.C.B.'s strategy is changing and the S.M.P. is about to be used?” Ken Wattret, an analyst at the French bank BNP Paribas, wrote in a note to clients, referring to the Securities Markets Program, as the E.C.B. calls its bond-buying operation.
“Or,” Mr. Wattret wrote, “is it merely a threat to act, designed to put some two-way risk back into markets?”
The second scenario is more likely, Mr. Wattret said. Indeed, the yield, or effective interest rate, on Spanish 10-year bonds fell below 7 percent in trading Thursday.
Earlier this month the E.C.B. cut its benchmark interest rate to a record low of 0.75 percent. But the cut does not appear to have lowered borrowing costs for business and consumers in the countries like Italy and Spain that need it most.
With official interest rates already so low, there has been speculation that the E.C.B. will need to reach for other monetary policy tools to restore the flow of credit, and ultimately to preserve the common currency.
Mujtaba Rahman, an analyst at Eurasia Group who covers Europe, pointed out that the end of the euro would mean the end of the E.C.B. as an organization, something Mr. Draghi obviously wants to prevent.
“If the euro disintegrates, they are all out of work,” Mr. Rahman said. “So, there is a preservation instinct at play here also.”
[h=6]Simon Dawson/Bloomberg News[/h]Mario Draghi, the European Central Bank chief, in London on Thursday for a meeting of business leaders.
The euro and European stocks rose sharply Thursday after Mario Draghi, president of the E.C.B., said in London that the bank would “do whatever it takes to preserve the euro.”
His comments were interpreted by some to mean that the E.C.B. might resume intervening in bond markets to keep borrowing costs for Spain and Italy under control.
The E.C.B. would stay within its mandate, Mr. Draghi said in remarks at an investment conference. But he added that if government borrowing costs interfered with the central bank’s ability to influence interest rates, “they come within our mandate.”
Mr. Draghi did not explain how the E.C.B. mandate would apply in this case, but the bank's main task under its charter is to maintain price stability, which it typically does by adjusting interest rates. As it has in the past, the E.C.B. could justify bond market intervention as a way of ensuring its control over interest rates.
The E.C.B. has intervened sporadically in government bond markets since 2010 but has not bought any government bonds for several months. Both the Spanish government and the International Monetary Fund have been urging the E.C.B. to resume buying bonds. But the interventions have been opposed by the Bundesbank, Germany’s powerful central bank, which regards them as a violation of a ban on using the E.C.B. to finance governments.
The mere threat of renewed E.C.B. intervention could help push down borrowing costs for Spain and other troubled countries. Traders may not want to risk betting against the E.C.B., with its massive resources. In recent days, the effective interest rate on long-term Spanish government bonds rose well above 7 percent, to levels that could eventually make it impossible for the country to roll over its debt.
“Are the latest comments a signal that the E.C.B.'s strategy is changing and the S.M.P. is about to be used?” Ken Wattret, an analyst at the French bank BNP Paribas, wrote in a note to clients, referring to the Securities Markets Program, as the E.C.B. calls its bond-buying operation.
“Or,” Mr. Wattret wrote, “is it merely a threat to act, designed to put some two-way risk back into markets?”
The second scenario is more likely, Mr. Wattret said. Indeed, the yield, or effective interest rate, on Spanish 10-year bonds fell below 7 percent in trading Thursday.
Earlier this month the E.C.B. cut its benchmark interest rate to a record low of 0.75 percent. But the cut does not appear to have lowered borrowing costs for business and consumers in the countries like Italy and Spain that need it most.
With official interest rates already so low, there has been speculation that the E.C.B. will need to reach for other monetary policy tools to restore the flow of credit, and ultimately to preserve the common currency.
Mujtaba Rahman, an analyst at Eurasia Group who covers Europe, pointed out that the end of the euro would mean the end of the E.C.B. as an organization, something Mr. Draghi obviously wants to prevent.
“If the euro disintegrates, they are all out of work,” Mr. Rahman said. “So, there is a preservation instinct at play here also.”