ECB plan 'for unlimited bond-buying'

The plan will only focus on govt bonds rather than a broader range of assets

European Central Bank President Mario Draghi’s bond-buying proposal involves unlimited purchases of government debt that will be sterilised to assuage concerns about printing money, two central bank officials briefed on the plan said.

Under the blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the people, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.

An ECB spokesman referred to an August 20 statement in which the Frankfurt-based central bank said it was misleading to report on decisions that haven’t been taken yet.

Draghi told the European Parliament this week that the ECB needs to intervene in bond markets to wrest back control of interest rates in the fragmented Euro-area economy and ensure the survival of the common currency.

Policy makers will start deliberating on the plan later today and Draghi will announce whether it has been agreed to at a press conference tomorrow.

The officials said policy makers are likely to adopt the proposal, with Germany’s Bundesbank remaining the sole objector.

At the same time, one said Draghi’s relationship with Bundesbank President Jens Weidmann remains relaxed, and the two men only disagree on whether risks inherent in the bond plan are likely to materialise.

To sterilise the bond purchases, the ECB will remove from the system elsewhere the same amount of money it spends, ensuring the programme has a neutral impact on the money supply.

At the moment, the ECB mops up the impact of its mothballed bond-purchase program by offering banks weekly term deposits that currently return 0.01 per cent.

With the central bank’s deposit rate at zero and the Euro- area banking system currently awash in about euro 800 billion ($1 trillion) of excess liquidity, a larger bond programme may not present the ECB with a major obstacle.

While the ECB doesn’t expect to have to spend large sums of money on bonds, Draghi’s plan calls for no limits to be set, two of the officials said. The ECB also won’t have seniority on any bonds it buys, they said. No yield-spread targets or bands will be set publicly, they said. Two said targets won’t be set internally either and that interventions will be discretionary.

Draghi will stress conditionality of the programme tomorrow, with the ECB likely to stop buying the bonds of any government that fails to meet the conditions it agrees to when it signs up for aid from Europe’s rescue fund — a precondition for ECB action — two of the people said.

Another proposal is for the ECB to sell the bonds it has bought if a country doesn’t comply with the conditions, two of the officials said.