The European Central Bank's next president warned eurozone governments on Monday not to assume the ECB will buy bonds indefinitely, despite the bank doubling its purchases last week to help his native Italy. Mario Draghi and incumbent ECB President Jean-Claude Trichet instead pressed European governments to implement a strengthening of the bloc's bailout fund - a reform that could allow it to relieve the ECB of its bond-buying role.
The ECB reluctantly reactivated the bond-buying plan after a 19-week pause last month when Italy and Spain came closer to succumbing to the eurozone debt crisis after a market attack that drove their borrowing costs to unsustainable levels. The ECB is concerned, however, that its efforts to hold down borrowing costs for Italy - the eurozone's third largest economy - are only encouraging the Italian government to slacken efforts to shore up its finances.
Draghi, an Italian who will succeed Frenchman Trichet as ECB president in November, warned governments they should not assume the purchase operations would continue indefinitely. "The Programme is temporary and fully sterilised; most importantly as (Trichet) remarked, it cannot be used to circumvent the fundamental principle of budgetary discipline," Draghi said in the text of a speech delivered in Paris. The text also included the words, printed between square brackets, [in other words, it should not be taken for granted by member states].
The ECB increased its bond purchases to 13.305 billion euros ($18.8 billion) last week, when it bought Italian government debt to support an auction in Italy that nonetheless met weak demand. It bought 6.651 billion euros worth in the prior week and a Reuters poll had forecast the latest purchases at just 7 billion. However, yields on Italian and Spanish government bonds rose to near one-month highs on Monday after Italian Prime Minister Silvio Berlusconi backtracked on austerity proposals seen as a vital condition for the ECB's bond buying.
Italian bond yields traded around 5.5 percent, above the 5 percent level the ECB appeared to be targeting recently. By allowing market borrowing costs to drift up, the ECB could increase pressure on Italy to implement austerity measures. Highlighting the seriousness of Europe's debt crisis, Deutsche Bank Chief Executive Josef Ackermann said it would stunt bank profit for years and could kill off the weakest. With some eurozone states also dragging their heels in approving reforms of the European Financial Stability Facility (EFSF) agreed in July, Trichet and Draghi said any delay risked worsening the eurozone's debt crisis.
"It is clear ... that we have an absolute and total need for all of the decisions to be implemented immediately as was decided ... by the different heads of state and government," Trichet said at the conference in Paris. The plans to strengthen the EFSF will empower the bailout fund to buy bonds - in theory relieving the ECB of a task that has provoked the most damaging internal split in the bank's 13-year history.
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