Euro rises on report of ECB plan to buy unlimited debt

Mario Draghi expected to announce plan to buy unlimited quantities of government debt from troubled eurozone members. German Chancellor Angela Merkel tells lawmakers she opposes unlimited European Central Bank bond purchases…



Powered by Guardian.co.ukThis article titled “Euro rises on report of ECB plan to buy unlimited debt” was written by Larry Elliott, economics editor, for guardian.co.uk on Wednesday 5th September 2012 14.19 UTC

The euro rose on the foreign exchanges on Wednesday after the Bloomberg financial news service reported that the European Central Bank was preparing to announce plans to buy unlimited quantities of government debt from troubled members of the single currency.

Quoting central bank officials, the agency said the ECB was ready to take action to bring down the interest rates on borrowing paid by countries such as Italy and Spain. Full details of the blueprint are likely to be disclosed by Mario Draghi, the ECB president, on Thursday after a meeting of the central bank’s governing council.

According to the Bloomberg, the ECB plans to “sterilise” its bond-buying by removing money from elsewhere in the eurozone economy such as by selling bonds or restricting the money supply. This could ease fears that action to help the weaker members of the 17-nation bloc will lead to an explosion in the money supply.

The ECB is likely to concentrate on buying short-term debt – bonds that mature within three years – in the hope that it will provide breathing space until longer-term measures are in place.

Germany has been critical of Draghi’s plan to “do whatever it takes” to prevent a breakup of the single currency, but Bloomberg said the ECB expected the proposals to be adopted despite the misgivings of Angela Merkel and the president of the Bundesbank, Jens Weidmann.

Some analysts have been expecting Draghi to set a target level for bond yields of eurozone countries, but this is not thought to form part of the proposal.

The euro rose by half a cent after the apparent leak of the Draghi plan, although some analysts remained cautious. “I think the market saw the word ‘unlimited’ and jumped before realising that the ECB would not expand its balance sheet as it would sterilise all its purchases and thus this was not the kind of aggressive monetary expansion that FX traders were looking for,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

“Net takeaway is that if this is sterilised it will probably not be enough to keep the bond vigilantes at bay. Furthermore, the backing away from any specific yield targets is exactly the lack of clarity that the FX market will not like.”

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