ECB pledges to save euro as Spanish crisis intensifies
By Sarah Collins | Thursday 26 July 2012
European Central Bank President Mario Draghi has indicated the bank is ready to buy the bonds of troubled eurozone countries if the eurozone debt crisis intensifies. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he told the Global Investment Conference in London, on 26 July. “To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate,” he said, referring to elevated borrowing costs (sovereign risk premia) for Spain and Italy.
The bank shelved its securities markets programme in April after spending €212 billion buying Spanish, Italian, Greek, Portuguese and Irish bonds, the idea being to increase demand and prices and lower yields (the amount investors charge to buy the bonds) and spreads (the difference between yields on Spanish and benchmark German debt). Spanish yields rose to record levels this week - above the 7% considered a trigger point for bailouts - after the autonomous regions of Valencia and Catalunya requested help from the central government’s €18 billion liquidity fund.
Meanwhile, the Governor of Austria’s Central Bank, Ewald Nowotny, who sits on the ECB’s Governing Council, has said there are “pros” to giving the eurozone’s future bailout fund, the European Stability Mechanism (ESM), a banking licence - a move many analysts say is essential to ensure it has enough cash to fund future bailouts. Speculation has been growing that Spain will require a full bailout after a €100 billion bank-specific loan, inked on 20 July, has failed to calm market panic. Draghi and the ECB have so far ruled out the idea, but it is supported by French President François Hollande.