Insight: ECB thinks the unthinkable, action likely weeks away

Mon Jul 30, 2012 10:30am EDT
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By Paul Carrel and Paul Taylor

FRANKFURT/PARIS (Reuters) - The European Central Bank is thinking the unthinkable to save the euro, including resuming its controversial bond-buying program and possibly even pursuing quantitative easing - in effect printing money.

Bold action is probably at least five weeks away, insiders say, though some more clues may come when the ECB reveals its latest interest rate decision on Thursday.

Several other pieces have to fall into place before the ECB will act decisively, insiders say. These include a request for assistance from Spain, which Madrid is still resisting, a decision by euro zone leaders to let their bailout fund buy bonds at auction, and a German court ruling on the legality of the euro zone's permanent rescue fund, due on September 12.

Above all, ECB President Mario Draghi must overcome the resistance of Germany's powerful central bank, the guardian of monetary orthodoxy, glowering from the other side of Frankfurt.

Draghi raised expectations last Thursday that the ECB would resume buying sovereign bonds as Spanish and Italian borrowing costs vaulted towards levels that could force the euro zone's third and fourth largest economies out of the credit markets.

"Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," he told a pre-Olympic investment conference in London.

Draghi made it clear he believes the ECB can legitimately intervene in bond markets to curb the high interest rates investors are demanding for buying Spanish and Italian debt rather than safe-haven German Bunds. "To the extent that the size of the sovereign premia hamper the functioning of the monetary policy transmission channels, they come within our mandate," he said.

His remarks surprised some colleagues on the ECB's policy-setting Governing Council, who had not been consulted, central bank sources said.   Continued...

A structure showing the Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt July 11, 2012. REUTERS/Alex Domanski