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ECB bond-buying scheme likely to have loose conditions -sources -Breaking


© Reuters. FILE PHOTO A view of the headquarters of European Central Bank (ECB), in Frankfurt, Germany at sunset on January 5, 2022. REUTERS/Kai Pfaffenbach/

By Francesco Canepa

MILAN (Reuters), Reuters sources said that the European Central Bank will likely attach loose conditions to a scheme to limit borrowing costs in order to gain support.

On Wednesday, the ECB intervened to stop a rout on bond markets by announcing that it would be implementing a new purchasing scheme to combat “fragmentation,” or the widening gap in yields between Germany’s and lower-rated countries like Italy.

ECB personnel are working to clarify details of the scheme.

Sources familiar with the situation said that conditions would be placed on the scheme, including the requirement that all countries adhere to economic recommendations by the European Commission.

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They are published annually by the European Commission. These usually address structural issues of a country, such as their labour market or retirement system.

Sources claim that the ECB will clarify the purpose of the scheme, which is to keep the spreads at a level with economic fundamentals rather than reducing them to zero like before the crisis of confidence a decade back.

Sources indicated that this will most likely happen through the use of quantitative benchmarks such as historical spreads. These could then be converted into a traffic light system for instructing staff about which country’s bonds they should buy at what frequency.

Due to confidential discussions, the sources were not able to provide names.

A spokesperson for the ECB declined to comment.

These safeguards are vital for ensuring support from all countries, even Germany. The government and parliament will review the decision, and possibly the highest court might be asked to make a ruling.

Several German academics complained in several lawsuits against the Karlsruhe Constitution Court about past ECB bond buying schemes.

Although their claims were rejected in the end, German judges demanded Berlin examine ECB decisions carefully to determine if they could be harmful to taxpayer funds.

The new program was tied to recommendations from the European Commission, but it is still less strict and politically acceptable than the ECB’s old rescue plan. That scheme required that countries in crisis apply for a complete bailout.