ECB bond-buying strategy demands commitment to reforms from troubled countries

European Central Bank (ECB) (AFP Photo)
The European Central Bank will only buy a euro zone country's sovereign bonds if it commits to "hard reforms", says ECB policymaker Joerg Asmussen.

His comments following rising concern in Germany that the central bank’s new programme of unlimited bond-buying is too risky.German media criticized the ECB's new strategy, unveiled on Thursday, which implies unlimited bond-buying to lower struggling euro zone countries' borrowing costs to halt the crisis.

Asmussen, a former deputy German finance minister, explained in an interview to Inforadio that bond-buying “will only take place when the country undertakes tough reform measures. That is a necessary precondition for the ECB to act.” "We will do our part, within our mandate," he concluded.

Last year purchases of Italian and Spanish bonds badly affected the ECB, mainly because Italy's then-Prime Minister Silvio Berlusconi, failed to keep his promise of reforms when he asked the ECB to step in and stabilize the situation in the country.

Asmussen said ECB bond purchases are expected to trigger a more effective monetary policy in the euro zone, and could not substitute for the reforms government must pursue to restore their economies.

"They can only take place when the affected country commits itself to tough reforms. This is an imperative, a necessary prerequisite for our function," he said.

"We must avoid decreasing the pressure on the states concerned to implement reforms on their budgets, bolster competitiveness or getting banks' balance sheets in order," he added.

Experts share German concerns, though that it is not so much about the risk, rather the low effectiveness of the measure.

“It is simple. The ECB will buy short-term bonds with maturity of up to three years, but at the same time will resell corporate bonds. And bond buying will be sterilized, meaning it will not lead to an increase of the global liquidity in the market. As a result, the effect of this strategy will be short-lived. I don’t expect this kind of plan to work for more than 3 to 4 months, because it doesn’t address the main crisis of the euro zone. The main crisis is not a crisis of debt. It’s a competitive crisis and it’s a decrease and collapse of growth.” says Jacques Sapir, French economist and the director of studies at Ecole des Hautes Etudes en Sciences Sociales.