European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro, suggesting they may intervene in bond markets as surging yields in Spain and Italy threaten the existence of the 17-nation currency bloc.
“To the extent that the size of these sovereign premia hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said in a speech at the Global Investment Conference in London today. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he said, adding: “believe me, it will be enough.”
Economists said the comments suggest the ECB may be preparing to unveil new measures to fight the crisis as potential bailouts for economies the size of Spain and Italy threaten to overwhelm Europe’s rescue funds. Spanish politicians have called on the ECB to do more after yields on the country’s bonds soared to euro-era records this week.
Spanish yields slumped after Draghi’s remarks, with the rate on the 10-year bond dropping 32 basis points to 6.98 percent at 1:26 p.m. in Madrid. It touched a record 7.69 percent on July 22. The euro jumped and stocks rose. The single currency climbed as high as $1.2285 after trading at $1.2118 before Draghi spoke. The Stoxx Europe 600 Index gained 1.6 percent.
“His comments certainly suggest that ECB purchases of Spanish and Italian bonds are back on the table for discussion,” said Chris Scicluna, head of economic research at Daiwa Capital Markets Europe. “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.”
The ECB mothballed its bond-buying program in March as it pushed governments to do more to control their deficits and implement reforms. Leaders have since inked agreements that aim to push the single currency towards tighter joint budgetary surveillance and a so-called banking union.
Draghi said today that markets are underestimating the progress that’s been made and the euro area is stronger than many think.
“It was a very clear and strong statement, aimed at showing markets that the ECB is willing to take its part of the responsibility,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “But the ECB wants to see government money used first. They won’t become active at this stage.”
ECB Governing Council member Ewald Nowotny yesterday buoyed the euro and stock markets after saying in an interview that there are arguments in favor of giving Europe’s permanent bailout fund, the European Stability Mechanism, a banking license. That would enable it to refinance with the ECB, boosting its firepower.