The European Central Bank’s newly announced
bond-buying program continued pushing regional stock markets up and key
interest rates down Friday – just the sort of confidence-building effect that
its president, Mario Draghi, had hoped for.
But in the long term, the effectiveness of
the the new program unveiled Thursday remains in doubt.
Will the ECB initiative work as well as
emergency efforts by Federal Reserve during the U.S. financial crisis, when the
Fed’s willingness to buy billions of dollars of troubled securities convinced
private investors to return to the credit markets?
Or will the ECB program meet the same fate
as an earlier European effort, before the euro zone was established, to keep
the region’s exchange rates in line with each other? That program was abandoned
after speculators overwhelmed Europe’s central bankers.
The first test is likely to come from
Spain. The country is riding a fine line between needing the sort of bailout
provided to Greece, Ireland and Portugal by international lenders and retaining
enough trust among investors that they keep lending Spain money.
Spain doesn’t want to ask for a bailout.
But to get the ECB’s help, the nation will have to make a formal appeal to the
rest of the euro zone for help and agree on a series of economic reforms.
Spanish officials have been adamant that
they can put a successful deficit-cutting and economic reform program in place
without bailout loans or the outside European or International Monetary Fund
oversight that would go along with the emergency assistance.
Spanish officials have yet to say whether
they will avail themselves of the ECB’s help. “These matters must be analyzed
calmly and carefully,” Deputy Prime Minister Soraya Saenz de Santamaria told
journalists in Madrid on Friday, according to wire service reports. “They have
important implications for our country and our future.”
Spain is already relying on European
bailout funds to pay for an expensive rescue of the country’s banking system.
Analysts expect it is only a matter of weeks before the government in Madrid
requests broader assistance.
The promise of unlimited bond purchases
and, implicitly, a cap on Spain’s high borrowing costs “has now thrown down the
gauntlet to the government of Spain,” analysts from Barclays wrote Friday. “The
government of Spain has little choice” but to respond.
The rescues of Greece, Ireland and Portugal
involved large loans from the rest of Europe and the IMF. The help allowed the
countries to stop selling government bonds for several years — in essence
insulating them from the international markets while repairing their finances.
For Spain and perhaps Italy, the aim is to
ensure that market access is never lost, Europe and the IMF would be
hard-pressed to pay the debts of these two major economies. And a default in
either country could damage the world economy.
Instead, Spain may ask to be approved for a
precautionary credit line — a program that would give the country access to
emergency funds if it needs them. To qualify, Spain would have to vet its
finances and budgets with the IMF and other European nations. If the credit
line were approved, the ECB would be willing to open the taps and buy bonds
from existing investors. By boosting the demand for government bonds, the ECB
would aim to keep the interest rates at a reasonable level so the country can
continue to borrow the money it needs and never have to use the emergency
funds.
Europe’s bailout fund, the European
Stability Mechanism, could also be involved in buying longer-term bonds,
directly from the government — a further way for Europe to help Spain and
perhaps Italy.
The program has raised objections from
some, particularly in Germany, who are worried it will concentrate the risks of
any government default within the ECB and the bailout fund — essentially making
it the responsibility of European taxpayers rather than investors who have
taken a willing gamble.
Draghi has been quizzed about other risks
as well such as that governments might start selling only three-year bonds in
hopes of goading the ECB into buying more, or that speculative attacks might
test his willingness to protect the currency. Draghi has said he would “do
whatever it takes.”
Stressed by such attacks in the early
1990s, the Bank of England eventually abandoned efforts to keep the pound in
line with the German deutschemark — the effective end of a currency management
system that predated the euro.
Draghi, noting that the ECB’s asset
holdings are only equal to about 3 percent of the region’s economic output —
less than that accumulated by the Fed and the Bank of England — said the bank
has plenty of firepower and the will to use it.
“We say the euro is irreversible. So unfounded fears of reversibility
are just what they are,” Draghi said, “unfounded fears.”
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