European Central Bank President Mario Draghi said policy makersagreed to an unlimited bond- purchase program to regain control ofinterest rates in the euro area and fight speculation of a currencybreakup.

The program “will enable us to address severe distortions ingovernment bond markets which originate from, in particular,unfounded fears on the part of investors of the reversibility ofthe euro,” Draghi said at a press conference in Frankfurt after theECB held its benchmark rate at a record low of 0.75 percent. “Underappropriate conditions, we will have a fully effective backstop toavoid destructive scenarios with potentially severe challenges forprice stability in the euro area.”

Draghi has staked his credibility on the bond plan, tellinglawmakers in Brussels this week that the ECB needs to wrest backcontrol of rates in a fragmented economy and save the singlecurrency. Now it's up to governments such as Spain and Italy totrigger ECB bond purchases by requesting aid from Europe's rescuefund and signing up to conditions.

“Governments must stand ready to activate the EFSF/ESM in thebond market when exceptional financial-market circumstances andrisks to financial stability exist — with strict and effectiveconditionality,” Draghi said. The ECB reserves the right toterminate bond purchases if governments don't fulfil their part ofthe bargain, he added.

ECB Purchases

The ECB will target government bonds with maturities of one tothree years, including longer-dated debt that has a residualmaturity of that length, Draghi said. Purchases will be fullysterilized, meaning that the overall impact on the money supplywill be neutral, and the ECB will not have seniority, he said.

The euro fell as Draghi spoke, easing to $1.2586 from $1.2644beforehand. The yield on Spain's two-year government bond fell to3.05 percent at 2:12 p.m. London time, after earlier rising by asmuch as 22 basis points. Italy's two-year rate was eight basispoints lower at 2.36 percent.

The ECB has been at the forefront of fighting the debt crisis,which has so far pushed five countries into bailouts and driven the17-nation euro economy to the brink of recession.

The central bank today forecast a deeper economic contractionfor 2012 than it did three months ago. Euro-area gross domesticproduct will drop 0.4 percent this year instead of 0.1 percent, itsaid.

In 2013, the economy will expand 0.5 percent rather than the 1percent forecast in June. At the same time, the ECB raised itsprojection for inflation next year to 1.9 percent from 1.6percent.

See a statement on the ECB's plan here.

Bloomberg News

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