ECB chief vows total support for euro

2012-07-27 08:10

London - European Central Bank chief Mario Draghi vowed unconditional support for the beleaguered euro on Thursday, sending markets soaring orbit as traders eyed further action from the bank to shore up the eurozone.

In apparently unscripted comments in London, the normally reserved Draghi said his institution was "ready to do whatever it takes to preserve the euro. And believe me it will be enough".

Stressing that the euro was "irreversible", Draghi said that part of his bank's remit was to keep sovereign debt levels under control when they hampered the proper functioning of interest rate policy.

Analysts saw Draghi's comment as a hint the ECB could soon reintroduce its hotly contested programme of buying up the bonds of struggling eurozone countries that has lain dormant for several months.

As Spanish borrowing costs soared over seven percent earlier this week - the level that forced Ireland, Portugal and Greece into bailouts - the bank has come under increasing pressure to restart the programme.

And Draghi's hints had an immediate impact on borrowing costs, with Spain's shooting below the seven-percent mark and Italian costs plummeting to just above six percent.

The comments also sent stock markets into euphoric mood and boosted the euro on the foreign exchange markets after several days of painful declines amid fresh speculation the eurozone might implode or Spain might need a bailout.

ABN Amro economist Nick Kounis said that Draghi had "opened the door for a restart of the central bank's government bond purchase programme", untapped since February.

"The crisis response looks likely to focus on direct intervention in the government bond market," he added.

And CMC Markets analyst Michael Hewson said that Draghi's remarks "suggest that the ECB may well do something about capping rising bond yields".

Attention would now turn to Draghi's monthly news conference in Frankfurt on August 2 "to see if he means what he says", the analyst added.

Since the eurozone sovereign debt crisis erupted more than two and a half years ago, the ECB has won praise as the only European institution that has acted quickly and decisively to stem the turmoil.

It has cut interest rates to a record low level of 0.75% and flooded banks with more than €1 trillion of ultra-cheap loans in a bid to stimulate lending and get the economy moving again.

ECB officials have never ceased to repeat that such measures are only temporary and merely meant to buy time for governments to tackle the root causes of the crisis - profligate spending.

Draghi insisted again in his London speech that the ECB did not want to "supplement actions that have to be taken by governments".

"That is not our job," he insisted.

But the central bank chief did praise efforts taken by EU leaders to fight the flames saying that "progress has been extraordinary in the last six months".

Meanwhile, European Commission President Jose Manuel Barroso, on his first visit to Athens since the crisis began, urged Greece to deliver on its obligations if it wishes to remain in the eurozone.

"To maintain the trust of its European and international partners, the delays must end. Words are not enough, actions are more important," Barroso said after talks with Prime Minister Antonis Samaras and Finance Minister Yannis Stournaras.

"All heads of states and governments of the euro area have stated in the clearest possible terms that Greece will stay in the euro as long as commitments made are honoured," Barroso told his hosts.

Samaras, who leads a three-party coalition government that campaigned on keeping Greece in the eurozone, said he was "determined to go ahead with structural changes and privatisations and implement the measures agreed on in order to reduce the deficit".

But the key measure demanded by EU-IMF lenders, whose auditors are again in Athens inspecting government books, now includes €11.6bn in new spending cuts, which is certain to face stiff resistance by Greeks.

The IMF said on Thursday that it expected discussions with Greek authorities over the country's bailout-supported programme to continue into September, longer than expected.

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