European Central Bank President Mario Draghi said the bank isready to start buying government bonds as soon as the necessaryconditions are fulfilled, putting the onus on Spain to decidewhether it wants a bailout.

The ECB is ready to undertake Outright Monetary Transactions“once all the prerequisites are in place,” Draghi said today at apress conference in Ljubljana, Slovenia, after policy makers leftthe benchmark rate at a historic low of 0.75 percent. The plan has“helped to alleviate tensions over the past few weeks” and “nowit's really in the hands of governments.”

A month after Draghi unveiled the unprecedented bond-purchaseplan to lower yields on government debt, Spain, the country mostlikely to take up the offer, is still mulling whether it wants toaccept the conditions attached. At the same time, the euro-areaeconomy probably entered a recession in the third quarter as thesovereign debt crisis damped spending and investment.

“With the OMT, the ECB has tackled and exorcised fears of animminent eurozone break-up,” said Carsten Brzeski, senior Europeaneconomist at ING Group in Brussels. With governments now underpressure to act, “for the time being, the ECB can lean back, watchand twiddle thumbs.”

The euro extended gains as Draghi spoke, rising to $1.2992 for a0.7 percent advance on the day. Separately, the Bank of Englandheld its bond-purchase target at 375 billion pounds ($603 billion)today and kept its key rate at 0.5 percent.

Under Draghi's OMT plan, a country must make a formal request toEurope's bailout fund to buy its debt on the primary market beforethe ECB considers buying bonds on the secondary market. SpanishFinance Minister Luis de Guindos has said officials are stillconsidering whether they need European Union aid.

While bond markets have rallied since Draghi pledged on July 26to “do whatever it takes” to preserve the euro, Spanish bonds fellfor a second day today as the nation sold 3.99 billion euros ($5.2billion) of two-, three- and five-year securities. Spain soldthree-year notes at an average yield of 3.956 percent, up from3.845 percent at the previous sale on Sept. 20.

Monti Caution

The yield on Spain's 10-year government bond rose 3 basis pointsto 5.79. Three months ago, the yield was above 7 percent. The yieldon Italy's 10-year security fell 1 basis point to 5.076percent.

Italian Prime Minister Mario Monti cautioned last week that aidshouldn't hinge on more conditions than leaders already signed upto and the International Monetary Fund shouldn't need to policeit.

Conditionality for a bailout “doesn't necessarily have to bepunitive” Draghi said as he praised Spain for making “significantprogress” in addressing its banking crisis. Still, “the ECB cannotreplace the action of governments.”

On Greece, Draghi rejected the suggestion that the ECB wouldparticipate in any further restructuring of Greek government bonds.“We have said several times that any restructuring of our holdingswould qualify as monetary financing,” he said.

While the ECB waits on Spain, the euro-area economy isdeteriorating. Manufacturing contracted for a 14th straight monthin September and consumer confidence also declined.

The ECB last month forecast a deeper economic contraction for2012 than it did three months earlier, saying gross domesticproduct will drop 0.4 percent instead of 0.1 percent.

“Economic growth in the euro area is expected to remain weak,with ongoing tensions in some euro-area financial markets and highuncertainty still weighing on confidence and sentiment,” Draghisaid.

Draghi also said that the ECB didn't discuss cutting ratestoday, even though inflation will drop below the ECB's 2 percentlimit next year.

“Another rate cut seems even less likely given this rhetoric,”said Christian Schulz, an economist at Berenberg Bank in London.“The ECB does not expect inflation to revert back to the 2 percenttarget before 2013.”

A majority of economists surveyed before Draghi spoke forecastthat the ECB will cut its benchmark rate in December.

Bloomberg News

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