EUROPEAN CENTRAL Bank president Mario Draghi has signalled the bank may revive its contentious interventions in sovereign bond markets to put a lid on surging Spanish and Italian borrowing costs.
As the debt crisis flares up again amid doubt over the rescue plan for Spain’s banks, Mr Draghi said the ECB would do all in its power to save the single currency.
His remarks, greeted with relief in official and diplomatic circles, prompted a stock market rebound in Europe and the US. The euro rose and Spanish and Italian bond yields dropped.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough,” Mr Draghi said in London. “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate.”
This mirrors language the ECB deployed to explain previous bond market interventions.
“Our job is to maintain price stability in the medium term. Our job is to cope with financial fragmentation, when it falls within our mandate,” Mr Draghi said.
He later added that he had provided a “candid” and “frank” assessment of the present state of play.
The pledge of action was welcomed by the International Monetary Fund, which has urged the ECB to step up its response to the escalating crisis. “Draghi’s remarks are a welcome reiteration of the ECB’s well-known commitment to do what is necessary,” said IMF spokesman David Hawley.
The ECB first bought bonds in May 2010 – buying Greek, Irish and Portuguese debt initially – and acquired Spanish and Italian debt for the first time last August.
The programme proved divisive in the bank’s top echelon and was suspended in March, four months after Mr Draghi took office.
The departure last year of two top-ranking German central bankers – Axel Weber and Jürgen Stark – is attributed to their dislike of the programme.
Although the ECB has cut interest rates to a record low and flooded the banking system with €1 trillion in ultra-cheap loans, it is under pressure to do more. Fearful of a full-blown sovereign bailout, the Spanish government has urged it to buy its bonds again.
EU leaders want to change their plan for Spain. They have resolved to directly aid the country’s banks, eventually removing bank debt from the national balance sheet, but not before a pan-European bank supervisor is up and running.
The European Commission will table draft legislation in September to establish the new system, said its president, José Manuel Barroso. “This will rely on the ECB as regards the euro area. We will propose to assign to the ECB supervisory tasks in full separation from its independent monetary policy responsibilities.”
