FRANKFURT The European Central Bank bought no government bonds last week before terminating its Securities Markets Programme (SMP) and replacing it with a new plan it hopes will be more effective in lowering struggling euro zone countries' borrowing costs.
The ECB is being forced to take a greater role in fighting the euro zone crisis while governments negotiate legal and political hurdles to coordinating a longer-term response.
Last Thursday, the central bank agreed to launch its new and potentially unlimited bond-buying programme, which is aimed at reducing crisis-hit euro zone countries' borrowing costs in return for them committing to tough reforms.
"Following today's decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated," ECB President Mario Draghi said after the ECB's policy meeting last Thursday.
The SMP proved controversial from its birth in May 2010, with then-Bundesbank chief Axel Weber almost immediately criticizing the programme, which soon lost credibility with markets. Weber quit in protest at the plan early last year.
The new programme agreed last week aims to convince markets by being potentially unlimited. Draghi was able to win support for the plan by insisting that the ECB would only help countries that signed up to and implemented strict policy conditions.
Jens Weidmann, Weber's successor as Bundesbank president, opposed the plan but was the sole dissenter on the policymaking Governing Council.
Because the ECB holds bonds it bought under the SMP to maturity, it will continue to publish the program's size every week and take the equivalent amount as weekly deposits from banks on Tuesdays to counterbalance the buys and neutralize any threat of them fuelling inflation.
With no previously bought bonds maturing and no new purchases, the overall amount of the SMP stands at 209 billion euros, the ECB said on Monday.
The ECB has hardly used the SMP since Draghi took over as president last November and stopped using it completely in March, acknowledging that the bond purchases lessen the incentive for countries to reform.
The ECB was hurt last year when it bought Italian and Spanish bonds, only for Italy's then-prime minister, Silvio Berlusconi, to go back on the reform promises he had made to get the ECB to step in just days after he made the commitments.
The ECB has learnt from the Italian experience - hence the tough conditions attached to any bond buying under the new plan.
"If the central bank were to intervene without any actions on the part of governments, without any conditionality, the intervention would not be effective and the Bank would lose its independence," Draghi said after Thursday's policy meeting.
The ECB will now focus on short-term papers and will only buy bonds with maturities of one to three years.
In contrast to the old programme, the ECB will drop its preferred creditor status, which means that the ECB will now be treated equally to private creditors in case of default.
It will still take the amount it buys out of the market through bank deposits and on top of weekly updates of its holdings and their market values, it will also publish the average duration of the bonds it buys and give a country-by-country breakdown on a monthly basis.
(Reporting by Eva Kuehnen; Editing by Toby Chopra)