The European Central Bank is in a wait and watch mode, says Ansgar Belke, chair for macroeconomics at the University of Duisburg-Essen, and is unlikely to do something extraordinary, like it did in September.
Mario Draghi’s pledge to do whatever it takes to preserve the euro and plans to buy unlimited bonds from the secondary markets to bring down borrowing costs if nations agree to tough budget deficit reduction programs was both bold and controversial.
However, inflation has gone up slightly from 2.6 percent to 2.7 percent while the eurozone finds itself in a deep recession. Hence, interest rate cuts are unlikely to take place, he noted.
Germans would like to know if Draghi’s plans on the so-called Outright Monetary Transaction (OMT) policy are conditional and, if the ECB would stop buying bonds should a country fail to stick to committed reforms. Asked if he thinks the ECB’s bond buying program goes beyond the central bank’s mandate, Ansgar said if it’s targeted at repairing the monetary transmission mechanism, then it’s okay because the ECB would then be following its mandate of price stability.
But, if OMT is aimed at financing public debt in disguise and the committed reform efforts lack credibility, then the ECB has clearly violated EU treaties and the German constitutional court may appeal against the OMT in the European Court.
Asked if Draghi’s pledge alone is sufficient to keep borrowing costs low for Spain that they may not need a bailout at all, Ansgar said the relatively lower borrowing costs due to OMT would provide Madrid bridge financing and gives its politicians a chance to bring interest rates down in the construction and infrastructure sector, which are currently too high compared to Germany or Japan.
The current high borrowing costs imply hidden write-offs for the banking system which Spain has displayed too well in the past. High bond yields also indicate possible future write-offs by the Spanish banks. Germany essentially views the continuous presence of the ECB in capital markets as a political failure and not a confidence crisis.
Spain may not go for a full blown rescue program that has strict deficit reduction targets, Ansgar observed. Rather Madrid may request enhanced credit facility from the ESM bailout fund that has milder austerity targets. With euro friendly parties in the German parliament, this could be easily approved by the Bundestag by next month, he noted. You can watch the video here.