LONDON: European Central Bank President Mario Draghi pledged on Thursday to do whatever was necessary to protect the euro zone from collapse, sending a strong signal that inflated Spanish and Italian borrowing costs were in his sights.
Fears about the euro zone's future are intensifying with Spain and Italy facing frenzied pressure on financial markets and Greece holding crunch meetings with its international lenders having failed to keep its repair plans on track, raising fresh questions about its place in the currency bloc.
With the need for urgent action becoming increasingly apparent, the ECB appears to be gearing up to flex its muscles, something Madrid and Rome have been seeking for months. "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," Draghi told an investment conference in London to mark the beginning of the Olympics.
"To the extent that the size of the sovereign premia (borrowing costs) hamper the functioning of the monetary policy transmission channels, they come within our mandate," he said. The comments are Draghi's boldest to date and suggest the ECB is ready to defend Italy and Spain whose borrowing costs have hit unsustainable levels. The euro jumped after his remarks and Spanish and Italian bond yields fell sharply. The ECB has kept its sovereign bond-buying programme mothballed for months. Internal opposition to reviving it is stiff so focus will turn to what else the ECB could do following Draghi's remarks. Economists think it could be forced to buy bonds again or support struggling euro zone countries via the back door.
On Wednesday, ECB policymaker Ewald Nowotny broke ranks with his colleagues, saying that giving Europe's permanent rescue fund a banking licence so that it could drawn on central bank funds had merits. Draghi and others have previously rejected that option. Alternatively, the bank could act as the Federal Reserve and Bank of England have, and opt for straight quantitative easing - money-printing by another name.
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