The ECB promised to buy unlimited short-term bonds from eurozone countries that have troubles financing themselves, under a new program called the Outright Monetary Transactions (OMT) and scrapped its old, Securities Markets Program (SMP) under which it was buying bonds selectively to bring down yields.
Analysts and investors in emerging markets have been watching the eurozone’s central bank anxiously to see whether the measures it will announce will be enough to put an end to the debt crisis, which impacted developing countries as well, because of the effects of uncertainty on capital flows.
“The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as program conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary program,” the ECB said in a statement.
ECB President Mario Draghi said the new program will be in force for member states that will apply for help from the eurozone’s two rescue funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) but also for member states that have already benefited from eurozone help and are now regaining market access.
“It’s three years because it seemed to us the most effective maturity to target,” Draghi said, adding that it was similar to the maturity used for the central bank’s two Long-Term Refinancing Operations (LTROs) launched in December last year and February this year, which for a while calmed the markets’ fears of a break-up of the eurozone. “We say that the euro is irreversible. Unfounded fears of the euro’s reversibility are just what they are, unfounded fears,” Draghi said.
The ECB suspended the application of the minimum credit ratings requirements for debt instruments issued or guaranteed by the central governments of the countries that are eligible for the OMT or are under a bailout program with the European Union and the International Monetary Fund and comply with its conditions.
The central bank will also accept securities issued and held in the euro area in US dollars (USD), British pounds (GBP) or Japanese yen (JPY) as collateral, to make it easier for countries to obtain funding, Draghi added.
The ECB held its main refi rate unchanged at 0.75 percent, contrary to analyst expectations of a quarter percentage point cut to 0.50 percent.
European stocks closed higher after the ECB decision, while yields on Spanish, Italian and other periphery eurozone bonds fell.