German Chancellor Angela Merkel visited Madrid on Thursday in order to hold crisis talks with Spanish President Mariano Rajoy and to take part in a German-Iberian entrepreneurial summit.
Angela Merkel said that reestablishing markets' confidence in the Eurozone was of utmost importance. Both leaders stressed that the Member States should join forces in order to attain a fiscal and political union in the euro area, which would help protect the common currency.
Merkel praised the reforms implemented by Rajoy's cabinet and expressed hope that Spain would have a realistic image of Germany, which does not try to impose difficult measures on other countries.
When asked about a possibility of Spain asking for a full EU bailout, which worries the markets, Rajoy refused to comment. The Spanish president assured however that as soon as any decisions in this respect are made, they will be officially announced. Merkel on the other hand informed that the question of conditions under which Spain could ask for a bailout was not raised at the meeting at all.
As far as ECB President Mario Draghi's intervention, Merkel diplomatically assured that the ECB “acted within its mandate and took appropriate measures.”
Draghi confirms ECB's plan to buy bonds on secondary markets
As it was highly expected (and which conviction was reinforced yesterday by a leak to the media) ECB head Mario Draghi announced on Thursday that the central bank would implement a program of purchasing government bonds in secondary markets in the Eurozone. Earlier on Thursday the Governing Council announced its decision of maintaining interest rates without changes at 0.75% in September.
At the subsequent press conference Mario Draghi explained that the ECB launched the bond-buying program in order to “preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area.”
As the president of the ECB suggested, the so-called Outright Monetary Transactions (OMTs), “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro”
The president also informed that the ECB would buy bonds of a maturity between one and three years and that the purchases would be completely sterilized. He also said that there would be no limits on their quantity. The IMF's role would be to check whether the countries which want to take part in the program fulfill the required conditions.
Additionally, the ECB cut Eurozone GDP forecasts, situating them in a range between -0.6% and -0.2% for 2012 and between -0.4% and 1.4% for 2013. As for inflation, the ECB said that it would continue above 2% this year and should follow below this level in 2013.
According to Marc Chandler from BBH: “That the staff GDP forecasts were cut for this year and next are not surprising, given the recent data and the additional austerity that will be implemented in the coming months.”
Spain sees bond yields tumble at auction
During a debt auction held on Thursday, Spain sold 3.5 billion euros worth of 2-, 3- and 4-year government bonds, at the top of the targeted range. The country's borrowing costs fell considerably.
In total, the Spanish Treasury issued 682 million worth of bonds maturing in 2014, 1.4 billion of bonds maturing in 2015 y 1.3 billion maturing in 2016.
2-year bonds were sold at an average yield of 2.7%, in comparison with 4.70% seen at the previous auction. 3-year bonds yielded 3.67%, which is much lower than 5.08% seen in July, while 4-year bonds yielded 4.60%, versus 5.08% the country had to pay in August.