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July 30, 2012 at 05:29 AM
After European Central Bank (ECB) President Mario Draghi said last week he would do “whatever it takes” to preserve the euro, he’s upping the ante by pushing both central bankers and political leaders in the joint currency bloc to agree to take drastic action to cut borrowing costs for Spain and Italy before an ECB policy meeting on Aug. 2.
Bloomberg reported Monday that as the debt crisis continues, Draghi hopes to quell market jitters that have sent bond yields steadily higher for the two countries considered next in line for possible bailouts. If he fails to win over other leaders in the eurozone, a bond market selloff could result in the sundering of the euro.
At the heart of his efforts, according to two ECB officials with knowledge of the plan, is the purchase of government bonds on the primary market by the region’s temporary bailout fund, the European Financial Stability Facility (EFSF). That would be backed by the ECB stepping in on the secondary market to make additional purchases and ensure the preservation of its low interest rates.
In addition, further rate cuts by the ECB and more long-term loans to banks are being considered as part of the strategy.
Moody’s Investors Service said in the report that while the ECB’s willingness to act is necessary to buy time, it cannot solve the crisis by itself. And the central bank may have a tough time persuading Germany’s Bundesbank to plunge in—just last week the central bank reiterated its opposition to bond buying, saying that such an action crosses boundaries that separate monetary policy from fiscal policy.
Another possible obstacle to a crisis solution is Germany’s reluctance to cede authority over its banks to a central body that would have control over a banking union—a plan previously discussed as a way out of the eurozone crisis.
Although Germany has insisted that other countries must surrender sovereignty over their banks and budgets in order to receive bailout money from common funds or to set up joint euro bonds, it has resisted doing so itself. In fact, during stress tests on financial firms last year by the European Banking Authority (EBA), Germany’s regulator allowed one of the country’s lenders to keep back results of the test and registered an objection to the definition of capital.
