Tuesday

3rd May 2016

ECB chief indicates upcoming help for Spain

  • "The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does," says Draghi (Photo: guysie)

Markets rallied after European Central Bank chief Mario Draghi on Thursday (26 July) pledged to do "whatever it takes" to salvage the euro and suggested the bank may buy more government bonds.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he said during a conference in London.

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Among these tools is a bond purchasing programme which had stalled this year after it helped to lower the borrowing costs of Italy and Spain in 2011.

Spain this week paid a euro-area record rate of 7.6 percent on its ten year bonds, despite the announcement of a eurozone bailout of up to €100 billion for its banks and more spending cuts worth €65 billion.

Draghi explained that as long as countries are paying higher interest rates than they should based on "factors" they can control, the ECB can intervene.

"To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate," he said.

His remarks mark a shift suggesting the ECB board next week may decide to resume the bond-purchasing programme that saw the ECB spend €210 billion on government bonds since May 2010.

The policy shift is not unexpected, however. The International Monetary Fund in recent weeks has suggested the ECB should intervene more forcefully to salvage the euro as it has enough tools to do so. And foreign diplomats Brussels earlier this month spoke of a "studied choreography" between EU governments and the ECB - first they have to do something for the bank to follow up with something in return.

Draghi indicated that this stage of the euro crisis - where market have lost confidence that the currency can work in the long run with so many divergent economies - it is important for leaders in the 17 euro countries to adhere to a long-term plan leading to a true economic and political union.

"The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does," he said.

"So the euro was a bumblebee that flew very well for several years (...) Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing."

The fundamentals of the eurozone are good, said the ECB chief, less inflation, less deficit and less debt than in the US or Japan.

With governments starting to reform their economies and at the same time work towards a true fiscal, economic and political union, "the euro is irreversible."

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