European Central Bank President Draws Line in Sand

Mario Draghi insists that Italy and Spain will have to apply for a bailout before the central bank can start buying their bonds.

European Central Bank president Mario Draghi in Berlin, Germany, March 26
European Central Bank president Mario Draghi in Berlin, Germany, March 26 (Bankenverband/Frank Ossenbrink Media Group)

European Central Bank president Mario Draghi announced on Thursday that he will not buy additional Italian and Spanish government bonds to help those countries reduce their borrowing costs in financial markets.

Draghi was under pressure from peripheral central bank members to start another bond buying operation but more hawkish members in Finland, Germany and the Netherlands had indicated ahead of his press conference on Thursday that they were opposed to such a move.

Although Draghi’s remarks left the door open to future bond purchases in coordination with the European bailout fund, he nevertheless drew a line in the sand when he insisted that “the ECB cannot replace governments.” Countries that suffer under high borrowing costs “need to go to the EFSF” first he said: the European Financial Stability Facility. Member states must unanimously agree for the EFSF to distribute financial aid.

Italy and Spain, which have seen interest rates soar in recent weeks, are hesitant to apply for a bailout through the EFSF because, as was the case in Greece, Ireland and Portugal, such a rescue operation would likely come with string attached: more austerity measures that are increasingly unpopular in both countries.

At a joint press conference in Madrid, Prime Ministers Mario Monti of Italy and Mariano Rajoy of Spain vowed that they would not request a bailout but continue their programs of fiscal consolidation.

“We are conscious that we are demanding great efforts from our citizens but we know that is the only way out,” said Rajoy. Monti added, “The solution can only be found if we all do our homework.”

The two leaders have announced billions worth of spending cuts and tax increases in their countries to mend their fiscal shortfalls and convince investors that their governments remain creditworthy. Italy and Spain have both seen their credit rating cut repeatedly over the last couple of years however and there is rising concern that they will soon fall victim to Europe’s spiraling debt crisis and eventually will have to apply for a bailout.

The European Central Bank started buying Italian and Spanish bonds in August of last year in order to reduce the pressure on both governments to speedily implement fiscal reform measures. Northern European states fear that another bond purchase operation will lift that very pressure and prolong the eurozone crisis.

The central bank shelved its bond purchase operation in April after buying €212 billion worth of Greece, Irish, Italian, Portuguese and Spanish debt. The bank did not disclose how much it spent on individual countries’ bonds.

Draghi had raised expectations of further monetary activism last week when he said in London that “the ECB is ready to do whatever it takes to preserve the euro.” He clarified those comments today, saying that the single currency was “irreversible” and therefore it was “pointless” to bet against the euro. “It stays.”

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