Below follows a quick and dirty translation of statements made by Klaas Knot in an interview with Het Financieele Dagblad published Saturday.
Before the interview, the newspaper rehashed recent history. Knot had said in early July that the ECB's government bond buying program was in the "deep freezer, and it will stay there" _ only to see the crisis intensify and Draghi say he would save the euro _ by any means necessary _ later the same month. In September, Draghi unveiled the new, as-yet untapped OMT program to buy government bonds. Knot, somewhat surprisingly, broke from the Netherlands' traditional support for German monetary policy, and supported the measure, leaving Bundesbank president Jens Weidmann isolated as sole opponent of the plan on the ECB's governing council.
For ease, I pulled the single best quote up to the top, and then translated most of the rest of the interview.
Q: Draghi says the instrument [OMT] is not intended to help individual countries, but to make sure that monetary policy continues to pass through to the real economy. Is that Kosher?
A: "If we were doing this to lower financing costs for individual countries, this would be at odds with the ban on monetary financing [under the Maastricht treaty which established the euro]. The only goal must be the restoration of the monetary transmission process. That this leads to lower financing costs is a side-effect."
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Q: Weren't politicians supposed to sort out the euro mess?
A: "Even if politicians take all sensible measures to find a lasting solution to the euro crisis, there are moments when financial markets act irrationally and there is a collective loss of confidence.
Then the speed at which interest rates [on Spanish and Italian debt] were rising caused a disorderliness which also threatened to undermine the political process. In that kind of situation there is only one entity that has both the balance and the decision making speed to act to stem that very destructive dynamic." [: ie, the ECB.]
Q: What would have happened otherwise?
A: "Then the interest rates of Italy and Spain would have kept rising by thirty, forty basis points per day. And then serious problems with debt sustainability would have emerged.
Q: [ECB action was an] Easy way out for the politicians, no?
A: "At a moment like that, speed is essential, because you don't want to let the genie out of the bottle. We wanted to nip that development in the bud, because once the rates get above 8, 9, 10 percent, then you'll have a lot of trouble getting them back again.
We couldn't have waited, not even if all the government leaders had come from vacation. They would have also felt obliged to consult with their national parliaments over possible action. You don't have that kind of time at that moment."
Q: Otherwise saving [bailing out] Spain and Italy would have been unavoidable?
A: "The costs of a rescue operation, if we had delayed, would no doubt have been many times greater than the costs of any rescue operation now will be."
Q: Did you know Draghi was going to announce this new plan in July?
A: "I didn't know exactly what he was going to say, but I knew that the technical work in the ECB was already taking place. We had discussed within the ECB that
it was unacceptable for us that investors should start pricing in that the eurozone could fall apart; and that combating such a development in interest rates falls completely within the mandate of the ECB."
Q: Well, there was certainly no way back for [national] central banks once he made the statement, no?
A: "I've said from the very beginning what my conditions were for any new program. If those conditions hadn't been met, I would have distanced myself immediately."
Q: So what were your conditions?
A: "I wanted that the countries in question would have strict conditions put upon them and that the IMF be involved. The IMF can, as a party outside the eurozone, credibly check those conditions are met. In addition, I wanted guarantees for an ECB exit as automatically as possible if a country failed to keep to the conditions. A third condition was that we would not set any exact target for interest rates [of government bonds in Spain or Italy].
The ECB must not think that it knows better than the market what the correct interest rates are. The intervention is only aimed at investors who are taking into account a eurozone disintegration."
Q: It's not that irrational that investors take into account the chance the euro could fail, is it?
A: The euro is irreversible. We've all said that together many times. Combating these extreme scenarios falls within the mandate of the ECB and that's also the goal of the new instrument [the OMT].
That's why we're not imposing any interest ceiling on the market, but we are rather reacting to disorderly market movements."
Q: Draghi says the instrument is not intended to help individual countries, but to make sure that monetary policy continues to pass through to the real economy. Is that Kosher?
A: "If we were doing this to lower financing costs for individual countries, this would be at odds with the ban on monetary financing [under the Maastricht treaty which established the euro]. The only goal must be the restoration of the monetary transmission process. That this leads to lower financing costs is a side-effect."
Q: Why would there be conditions imposed on the Spanish government if the instrument is only intended for the real economy?
A: "That has everything to do with the ability of a country to pay back its debt. That improves significantly because of such an imposed adjustment program of spending cuts and reforms. In this way, we as ECB reduce our risks. In addition, we are not alone in influencing the transmission of monetary policy in the economy: the behavior of the governments is at least an equally great influence on the long-term interest rates as our own behavior is."
[long passage of BS]
Q: [Jens] Weidmann of the Bundesbank is isolated [on the ECB governing council in opposing bond-buying], how bad is that?
A: "It's extremely distressing that we weren't able to reach a consensus. In my opinion, I am pursuing exactly the same goals as Weidmann. But I think I can be more effective within the governing council than outside it. Weidmann has chosen a different strategy."
Q: What does it mean that the Netherlands and Germany have been driven apart?
A: "This [the OMT] is a measure that I do not take lightly. It would have been my great preference that governments hadn't put us in this position. I have the same revulsion at monetary financing as Weidmann. I think that the guarantees that are built in ensure that this does not lead to monetary financing. We can, in the short term, create a little breathing room and buy time for the governments so that they can work on long term solutions for this crisis. The previous bond buying program proved to undermine the policy changes that are needed in the long term. The essential difference is that the new program is conditional and that is precisely what supports the long-term solutions."
Q: Is it credible to say the ECB will halt acting if Spain fails to satisfy the conditions?
A: "We will stop with our interventions once the inspection [sic] arrives in the capital. A positive judgment is a necessary condition, not a sufficient condition, to resume the program.'
Q: Suppose Spain doesn't keep to the agreements, and the interest rates start rising again, won't there be a moment when the ECB has to intervene again anyway?
A: No, because in that case a country [ie. Spain] apparently wouldn't be giving its all to reach a sustainable solution for the euro crisis. Then there's no more role for the ECB to play."
Q: Even if that means the end of the euro?
A: "All we can do is contribute what we can if the governments continue giving it their maximal effort toward a sustainable solution. If that condition is not met, everything we can do won't be effective anymore. This is a major step forward to do all that we can do. But we are dependent on politicians to do the same.
Q: The ECB has kept bending in recent years. Are their situations in which it would go still further?
A: "I can't respond to that. It's completely clear that if our governments don't choose a constructive attitude, we can't keep on doing our part. I would point out that we stopped buying Greek state bonds when we saw that Greece wasn't sticking to the agreements."
Q: You won't say that this plan [OMT] is the last and utmost?
A: "Take it from me that we are very close to it, but I can't see the future."
