Rising yields on bonds for Spain and Italy prompted European Central Bank (ECB) President Mario Draghi to declare that the central bank will do “whatever it takes” to keep the euro intact, as eurozone central banks looked for new ways to spur bank lending and undo the bloc’s financial logjam.
Meanwhile, Spain refuted reports in German and Italian newspapers that it on the verge of asking the European Financial Stability Facility (EFSF) to buy bonds as a means of lowering yield.
Bloomberg reported Thursday that Draghi spoke in London to reassure markets that had driven yields for the two troubled countries to unsustainable levels. The ECB had halted bond purchases and resisted resuming them, but in his speech Draghi said, “To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate. We have to cope with the financial fragmentation, address these issues.”
He added, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
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The euro rose in the wake of his comments, although the long-term nature of such a commitment is still to be determined. Chris Scicluna, an economist at Daiwa Capital Markets Europe in London, said in the report, “[Draghi’s] comments certainly suggest that ECB purchases of Spanish and Italian bonds are back on the table for discussion, as is another LTRO,” referring to a long-term refinancing operation. “But—just like last summer—we would expect any new ECB bond purchases to be temporary and limited until other policies are put in place.”
Next week will see meetings of policymakers from the Bank of England (BoE), the ECB and the Federal Reserve during a 24-hour period as they look for strategies to open up avenues of credit.