Bloomberg News

Draghi Signals ECB Won’t Step Up Bond Buying to Halt Crisis

December 20, 2011

(Updates with ECB bond purchases in sixth paragraph. For more on the euro crisis, click on EXT4.)

Dec. 19 (Bloomberg) -- European Central Bank President Mario Draghi damped expectations that the bank will step up bond purchases to tame the sovereign debt crisis, saying it can’t overstep its mandate.

“People have to accept that we have to, and always will, act in accordance with our mandate and within our legal foundations,” Draghi told the Financial Times in an interview, confirmed by the Frankfurt-based ECB. “The important thing is to restore the trust of the people -- citizens as well as investors -- in our continent. We won’t achieve that by destroying the credibility of the ECB.”

The ECB is resisting pressure to increase its bond buying, saying governments need to find a lasting solution to the debt crisis. The central bank has instead focused on helping the banking industry and will this week offer financial institutions in the 17-nation euro area unlimited three-year loans. Draghi said it’s up to banks to decide what to do with the money.

“One of the things that they may do is to buy sovereign bonds,” he said. “But it is just one. And it is obviously not at all an equivalent to the ECB stepping up bond buying. One aspiration is to have them financing the real economy, especially small- and medium-sized enterprises.”

Bond Yields

Spanish and Italian notes advanced last week, driving down yields, on speculation banks bought the securities to use as collateral when the ECB starts offering the three-year loans tomorrow. Italian two-year yields were at 5.42 percent today compared with 7.66 percent on Nov. 25.

The ECB has so far spent 207.5 billion euros ($270 billion) on government bonds since its program started in May last year. It settled 635 million euros of purchases in the week through Dec. 9, the lowest amount since it resumed its market interventions in August.

The ECB, which says its bond buying is aimed solely at ensuring transmission of its interest rates on financial markets, will announce last week’s purchases at 3:30 p.m. in Frankfurt today.

Draghi said the ECB will act on behalf of Europe’s rescue fund, the European Financial Stability Facility, which has been empowered to intervene in bond markets. “Our aim is to be ready to provide agency functions in January next year,” he said.

While the ECB’s bond-purchase program is “neither eternal nor infinite,” it is “justified” as long as the transmission of the ECB’s rates is impaired, Draghi said. Still, asked if the ECB would consider capping yields, he said “monetary policy cannot do everything.”

--Editors: Carlos Torres, Ann Hughey.

To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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