Ireland, Portugal may not get a taste of ECB bond buys

FRANKFURT/DUBLIN Tue Jan 29, 2013 2:04pm GMT

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FRANKFURT/DUBLIN (Reuters) - The European Central Bank appears happy to leave Ireland and Portugal to fend for themselves, holding off directly buying the bail-out recipients' debt unless markets turn sour again.

Both Ireland and Portugal have re-entered sovereign bond markets recently, but the ECB has left investors and governments guessing about when it could use its new bond-buying programme, known as Outright Monetary Transactions (OMT).

The Irish are keen to have access to the programme - a yet-to-be-used tool the ECB unveiled to fight the euro zone crisis last September. Since then Spanish and Italian bonds yields have fallen sharply on the mere threat of ECB intervention.

But the ECB is showing no signs of coming to the aid of Ireland and Portugal. It has also rejected Ireland's preferred solution to a dispute over the cost of servicing money borrowed to rescue a failed bank, EU sources familiar with the talks said.

ECB President Mario Draghi would not be drawn directly into the Irish situation when asked this month about using the bond purchase plan.

"On Ireland and whether it qualifies for OMTs or not, I have said repeatedly what the prerequisites for access to OMTs are," Draghi told a news conference. "You know what they are."

Despite Draghi's assertion, analysts and governments are still in the dark about how the OMT works with countries already under bailout programmes rather than those that might in future apply for a bailout.

Bond issues in different maturities and foreign investor demand for them would be needed at the minimum - neither of which are firmly in place in Ireland and Portugal.

The European commissioner for economic affairs, Olli Rehn, said last week one option could involve providing a precautionary credit line from the euro zone bailout fund, which could be enough for the ECB to step in. The idea would be to encourage investors to buy.

But a source familiar with ECB thinking said that the central bank did not favour helping Ireland or Portugal by purchasing their bonds.

"I think there's a majority in the board that would rather not use OMTs for that kind of purpose," the source said. "The spreads reflect credit risk, which is not something you can or should diminish with the OMT."

CONSTRUCTIVE AMBIGUITY

When the programme was first unveiled in September, the clear targets were Spain and Italy, neither of which has applied for a full bailout from international lenders.

But the ECB also said purchases "may also be considered for member states currently under a macroeconomic adjustment programme when they will be regaining bond market access."

That would include Ireland and Portugal.

Later, the phrasing was adjusted to "full" and "complete" market access which raised the question of why countries with full access would need the ECB to intervene in the first place.

"Constructive ambiguity is part of having a deterrent," ABN Amro economist Nick Kounis said. "The OMT is not an instrument of incremental support, it's textbook bazookanomics."

It was a reference to firing a big strong response at an economic or market problem.

Similarly, it does not want to set the rules in stone so that it can quickly jump in if needed.

"ECB is still very non-transparent about OMT, and for good reasons," Commerzbank rate strategist David Schnautz said. "The ECB can soften its stance if there is a big-time hiccup."

The ECB's ambiguity may be designed to help it never actually having to use the programme, just its threat.

But EU politicians are eager for the ECB to get involved, as it would ease their load and reduce the need for government guarantees for any additional bailouts - credit rating agency Fitch has said Portugal is likely to need another round of help.

It is behind Ireland in gaining market access, but has managed to dip a toe in. It sold 2.5 billion euros of bonds on Wednesday, marking the country's first long-term debt issue since it was bailed out in 2011.

In Ireland, debt chief John Corrigan has said a resumption of monthly auctions could do the trick while finance minister Michael Noonan has said issuing a new benchmark bond on two occasions would be needed.

Ireland expects the OMT issue to come to the fore "towards the back end of 2013", a senior Irish official told Reuters.

But with the strong run in Irish debt pushing five-year yields to or just under 3 percent, the government needs to keep its ambitions for ECB help in check.

(Additional reporting by Daniel Alvarenga and Paul Taylor Editing by Jeremy Gaunt)

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