(Bloomberg) -- European Central Bank policy makers are open to activating their most powerful bond-buying tool if needed to help the region’s coronavirus-hit economy once governments lay the groundwork, according to people familiar with its discussions.
While the Outright Monetary Transactions program was only briefly mentioned at last week’s emergency meeting of the Governing Council, which focused on agreeing a different purchase program, it is clear there would be broad support, the people said. They asked not to be identified because the session was private.
Activating OMT -- which is contingent on countries securing from a European bailout fund -- would benefit euro-area members whose strained public finances risk limiting their ability to cushion the blow of the coronavirus pandemic. Greek bonds rallied after the report, with the yield on 10-year securities falling 11 basis points to 2.35%.
OMT was designed in 2012 after former President Mario Draghi pledged to do “whatever it takes” to save the euro during the region’s debt crisis. It allows the ECB to buy nearly unlimited quantities of a nation’s sovereign debt, pushing down bond yields that risk making much-needed fiscal stimulus unaffordable.
It has never been used, and has faced pushback from Germany’s Bundesbank, which is worried it would breach EU law against monetary financing of governments.
Due to the nature of the current shock though, officials no longer expect the Bundesbank to be strongly opposed. Spokesmen for the ECB and the Bundesbank declined to comment on the Governing Council’s deliberations.
Before President Christine Lagarde and her colleagues can launch the program, governments must secure some form of assistance from the European Stability Mechanism, a step Governing Council member Francois Villeroy de Galhau has already urged them to take.
That assistance normally requires governments to sign up to reforms, a stigma that could deter some. Governments are considering how they might provide credit lines with limited or no conditionality.
The central bank maintains that any EU decision on ESM credit lines shouldn’t explicitly state that OMT could follow, one person said. That judgment would be made by the ECB as an independent central bank.
Italy, which has been hardest-hit by the pandemic, has argued credit lines can only be a temporary solution. The country has the euro zone’s second-highest debt burden after Greece, making higher yields especially hard to cope with. The nation’s annual refinancing needs on public debt already amount to 20% of GDP.
Another potential solution, favored by Italy among others, would be a region-wide coronabond. During a teleconference of euro-area finance ministers last night, Lagarde made a strong push for that kind of joint debt issuance, though it fell short of garnering sufficient support.
While governments are acting slowly in coming up with a solution, the ECB has already stepped up its crisis response. Last week’s meeting resulted in a 750 billion-euro ($810 billion) Pandemic Emergency Purchase Program, meaning it’ll spend more than 1 trillion euros on debt this year. It is also proving loans to banks under extremely favorable conditions.
If the central bank added OMT, it would have the advantage of not being bound by the limits of existing bond-buying operations, which require buying debt in proportion to the size of individual economies.
The program is subject to limits on how much of each government’s bonds the ECB can hold, though policy makers have already said they’re willing to consider raising those limits. Purchases would be made in the secondary market.
(Updates with bonds in the third paragraph.)
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