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ECB chief plays down importance of bond rejection by banks

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Mario Draghi. Photo: Reuters

Mario Draghi. Photo: Reuters

Mario Draghi. Photo: Reuters

ECB president Mario Draghi yesterday downplayed the potential impact of central banks being allowed to reject bank bonds guaranteed by bailed-out countries like Ireland, saying the money involved was "peanuts".

The comments came the day after Germany's powerful Bundesbank said it would no longer accept bank bonds guaranteed by Ireland, Greece and Portugal. Austria yesterday indicated it was planning to follow suit.

The two central banks were empowered to refuse the bonds because of a recent ECB decision to give eurozone central banks the freedom to reject bank bonds guaranteed by countries in bailout programmes.

Irrelevant

"When all is said and done we are talking about peanuts," Mr Draghi said. "It's materially irrelevant... It's one of those things that was really overblown in communication terms."

Mr Draghi stressed the new freedoms applied only to a "very very restricted" set of bonds, and that government guarantees had only been extended to bank bonds "based on a crisis arrangement".

He defended the ECB's stance on the basis that national central banks were now taking on the risk for any bank bonds they accept which are covered by a guarantee from a bailed-out country.

Typically, the risks of money loaned through the ECB's 'main' operations is borne by the eurozone as a whole. "It seemed only natural to grant national central banks freedom since they were taking all the risks (for those bonds)," he said.

If enough national central banks refuse to accept bonds guaranteed by Ireland, then that could push down the price for those bonds since there will be less demand for them.

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