ROME/FRANKFURT (Reuters) - European Central Bank policymakers sent conflicting signals on Thursday over the conditions they want attached to their new bond-buying programme, with their apparent discord playing out in public just a week after the bank announced the plan.
The new programme has buoyed markets’ faith in policymakers’ ability to get on top of the euro zone crisis and the ECB must be careful that internal divisions do not undermine the plan from the outset - as happened with its previous bond-buy tool.
The bank has made any buying of government bonds under the programme conditional on the country concerned tapping the euro zone rescue fund for aid. That would come with strict conditions - a ploy aimed at calming German fears about the ECB’s strategy.
However, Italian central bank chief Ignazio Visco said the programme, which aims to lower struggling countries’ borrowing costs, will not be conditional on those countries taking new measures but will depend on policy progress being made.
The conditionality of the plan is “not linked to a series of measures to be taken but to progress in a certain direction,” Visco told a seminar at the Roma Tre University.
Visco’s comments chimed with remarks from another ECB policymaker, Frenchman Benoit Coeure, who said at the weekend the programme would not necessarily involve the countries concerned being asked to make more cuts, because some have already taken strong steps in that direction.
Coeure is a member of the Executive Board that forms the nucleus of the ECB’s policymaking Governing Council, where he is in charge of market operations and as such overlooks the implementation of the new bond purchase programme.
Another board member, German Joerg Asmussen, appeared to take a tougher stance last Friday, saying the ECB will only buy a country’s bonds if it commits to “hard reforms”.
Council member and Estonian central bank chief Ardo Hansson took a similar stance to Asmussen, saying the ECB may decide against buying a country’s bonds if it finds the bailout programme the country signs up to is not strong enough.
“If we look at a programme that is acceptable to a particular country and it turns out not to be strong enough, that is an ex-ante reason to say ‘no they won’t get the support from the ECB’,” Hansson told MNI News in an interview.
“I don’t think we can formulate our policy to do whatever is needed for governments to ask for a programme that is acceptable to them,” he added.
Spanish Prime Minister Mariano Rajoy is under strong pressure to apply for a limited assistance programme that would allow the rescue fund to buy Spanish bonds, and the ECB to intervene to bring down shorter-term borrowing costs, while keeping Spain in capital markets.
Rajoy took another half-step this week by saying he was considering requesting ECB support and would not object to IMF involvement in monitoring Madrid’s public finances.
The ECB policymakers, though apparently at odds, may be in agreement privately while tailoring their public comments to sell the bond-buying programme to sceptical domestic audiences.
“For the German public debate, it’s good to emphasise that the ESM (bailout fund) and the ECB will set very tough conditions,” said Berenberg Bank economist Holger Schmieding.
“And for Italian and Spanish domestic consumption, you could say that Italy and Spain are already doing tough reforms - so it is unclear whether there is much of a gap between saying ‘tough conditions’ and ‘nothing further’,” he added. “With Spain having already hiked VAT, that’s already pretty tough.”
Another ECB policymaker, Cyprus central bank chief Panicos Demetriades, said the mere threat of the ECB intervening with its potentially unlimited bond-buying programme could scare off speculators.
The threat of unlimited buying may mean that “in the end, action is not needed,” Demetriades told Bloomberg in an interview conducted on Wednesday.
“No one will speculate against the unlimited firepower of a central bank,” he said. “This is what stabilizes currencies of countries where investors know that. One wouldn’t gamble against the Federal Reserve, for example.”
Additional reporting and writing by Paul Carrel; Editing by Susan Fenton