ECB signals may buy euro zone bonds

Thu Aug 2, 2012 11:57pm EDT
 
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By Sakari Suoninen and Eva Kuehnen

FRANKFURT (Reuters) - The European Central Bank indicated on Thursday it may again start buying government bonds to reduce crippling Spanish and Italian borrowing costs but the conditions it set and the dissenting voice of its key German member disappointed markets.

In the latest move to contain the euro zone crisis, ECB President Mario Draghi indicated that any intervention would not come before September - and only if governments activated the euro zone's bail-out funds to join the ECB in buying bonds.

"The Governing Council ... may undertake outright open market operations of a size adequate to reach its objective," Draghi told a news conference after the central bank's monthly meeting, using the central bank's code for bond-buying.

The ECB kept euro zone interest rates at a record low 0.75 percent but Draghi said the council did consider a further rate cut on Thursday amid signs that an economic recession in peripheral European countries is spreading across the continent.

A Reuters poll of nearly 50 economists after Draghi spoke found that most expect the ECB to start buying Italian and Spanish bonds in September and to cut rates to 0.50 percent.

Draghi was under intense pressure from investors, European leaders and the United States to deliver on a pledge he made last week to do whatever it takes to preserve the euro by bringing high borrowing costs down.

But shares and the euro fell after the ECB chief's remarks, and Spanish and Italian bond yields jumped, with Spain's 10-year paper vaulting over the 7 percent danger level. <MKTS/GLOB>

"It is quite disappointing ... There is a lack of any action so he has basically passed the buck back on to politicians," said Ioan Smith, strategist at Knight Capital.   Continued...

 
European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt June 6, 2012. REUTERS/Alex Domanski/Files