FRANKFURT (Reuters) - European Central Bank President Mario Draghi said on Monday the organization would not use its yet-to-be-activated bond-buying program to save profligate countries from insolvency, but only to preserve the euro.
The central bank’s program has helped calm markets over the past couple of months, but it has raised particular concern in Germany, which is most exposed to potential risks involved as the ECB’s largest shareholder.
Draghi spoke on the eve of hearings at Germany’s top court to weigh the legality of so-called Outright Monetary Transactions (OMT) program.
“The ECB says if there is a confidence crisis in the euro which is threatening the solvency of the countries not beyond what their fundamentals are, then we are ready to intervene,” he said in a video interview with German public broadcaster ZDF.
“But we will not intervene to ensure the solvency of the countries if they are profligate,” he said, speaking in English.
The central bank launched the potentially unlimited bond-buying program in September to reduce crisis-stricken countries’ borrowing costs and defend the euro.
The German court hearings, to see whether it infringes the constitution’s insistence on sovereign parliamentary control over budget matters, take place on Tuesday and Wednesday.
No ruling is expected until after German national elections on September 22.
The ECB has in the past spent less on buying bonds than other major central banks, Draghi said.
Thanks to calmer markets after the announcement of the OMT, “the risks for the German taxpayer are much lower today than they were a year ago,” he added.
Draghi said interest rates - currently at a record-low level of 0.5 percent - will rise again when confidence in economic recovery returns.
Draghi said euro zone countries had made significant progress in the last year in terms of reducing their budget deficits, cutting public debt and becoming more competitive.
So the idea that big differences in interest rates were necessary to force governments to act was only partly true, he added.
“You don’t need spreads that are so high that the rest of the world will lose any confidence in the sustainability of the euro itself and therefore in the single countries,” he said.
“You need spreads that clearly reflect the fundamentals of the country. It would be profoundly mistaken if we were to lower these spreads artificially,” he added.
The ECB was committed “to remove only that part of the spread that has to do with the confidence crisis in the euro, which was the situation prevailing last year,” Draghi said.
Reporting by Eva Kuehnen and Sakari Suoninen in Frankfurt and Michelle Martin in Berlin