Draghi Defends Bond Program Ahead of Court Hearing

(FRANKFURT, Germany) — European Central Bank head Mario Draghi is defending a central bank program that has been credited with calming market turmoil over the continent’s debt crisis, ahead of closely watched hearings in a court challenge to the program next week. In the text of a speech to a conference in Shanghai, China, Draghi on Monday rejected criticism of the bank’s program to purchase government bonds, saying it had defused fears the eurozone might break up. Among the critics of the program is Germany’s Bundesbank central bank, which submitted a legal brief with its objections ahead of hearings in Germany’s Constitutional Court June 11-12 in Karlsruhe. The Bundesbank’s head, Jens Weidmann, voted against the program in his role as one of 23 member of the ECB’s governing council.The court ruling is shaping up as a potential source of worry about potential new disruptions to markets in Europe. Under the program, dubbed OMTs for outright market transactions, the ECB could buy government bonds issued by governments struggling with heavy debts. The purchases would drive down the interest costs those countries would face in the bond market when they sell new bonds to pay off old ones that are coming due, as they must constantly do. The catch is, governments that want help must apply for a bailout loan or credit line from the eurozone’s financial rescue fund, and agree in writing to take steps to reduce its deficits and debt. (MORE: The Great Central-Banking Experiment: Will Unlimited Cash Solve Problems or Cause Them?) No bonds have been bought. But the mere offer has lowered bond-market borrowing costs for indebted countries such as Spain and Italy. That has taken financial pressure off those governments and given them time to get their finances in order without worrying about a spike in borrowing costs. High borrowing costs pushed Greece, Ireland, Portugal and Cyprus to seek bailouts in the form of loans with strict conditions attached from the other eurozone governments. Draghi answered several of the objections that have been brought against the OMT

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