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ECB bond-buying scheme likely to have loose conditions -sources

·2-min read
FILE PHOTO: Sun sets over the skyline and ECB headquarters in Frankfurt

By Francesco Canepa

MILAN (Reuters) -The European Central Bank is likely to attach some loose conditions to an upcoming scheme designed to cap borrowing costs for the euro zone's most indebted states in a bid to win support for it, sources told Reuters.

The ECB stepped in to stem a rout in bond markets on Wednesday by announcing plans to devise a new purchase scheme aimed at fighting "fragmentation", or a widening gap between the yields paid by Germany and those of lower-rated countries such as Italy.

Details of the scheme are being ironed out by ECB staff.

Sources close to the matter said the scheme would likely have conditions, such as that countries comply with the European Commission's economic recommendations.

These are issued annually by the European Commission and typically address a country's structural issues, such as its labour market or pension system.

The sources said the ECB will spell out that the scheme's goal is simply keep bond spreads in line with their economic fundamentals, rather than bringing them to near-zero like they were before a crisis of confidence a decade ago.

This will likely be achieved through quantitative benchmarks, such as historical spreads, which may then be turned into a "traffic light" system to instruct staff on which country's bonds to buy and at which frequency, the sources said.

The sources declined to be named because the discussions are confidential.

An ECB spokesman declined to comment.

These safeguards were seen as vital to secure support by all countries, including Germany, where the government and parliament will scrutinise the decision and the top court may be called upon to rule on it.

Groups of German academics have complained about past ECB bond-buying schemes in multiple lawsuits at the constitutional court in Karlsruhe.

While their claims were ultimately rejected, the German judges have demanded that Berlin parse ECB decisions with a fine comb when they may endanger taxpayer money.

But tying the new programme with the European Commission's recommendations was still seen as less stringent and more politically palatable the ECB's previous rescue scheme, which required countries in distress to apply for a full-on bailout.

(Reporting by Francesco Canepa; Editing by Richard Chang)

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