The European Central Bank will buy bonds. But there are many strings attached.

September 6, 2012

Mario Draghi (Thierry Charlier/AFP/Getty Images)

As anticipated, Mario Draghi, head of the European Central Bank, has announced that he'll buy up unlimited amounts of Spanish and Italian debt, but only if they agree to fiscal limits, and only with money he gets from selling other investments. My colleague Howard Schneider has the goods:

The bond-buying will have conditions: Countries must agree with European leaders on steps needed to keep their economies competitive, control public debt and fix whatever led them into trouble to begin with. Without such “conditionality,” Draghi said, the bank would not intervene on a country’s behalf.

 

The bonds will not be purchased directly from national governments in their primary bond auctions but will be bought from existing investors. That can still have a potentially profound effect on market psychology and interest rates, essentially assuring private bondholders that the central bank won’t let a large nation such as Spain or Italy slip into the sort of spiral that forced holders of Greek bonds to accept massive losses.

As I explained yesterday, this won't have the same stimulative effect that bonds purchased with newly printed euros would have, and the austerity requirements will be hard for Spain to meet, and will like hurt growth even if it does meet them. But it's more than Draghi has done thus far.

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