- Associated Press - Thursday, December 15, 2011

BERLIN European Central Bank President Mario Draghi warned Thursday that there’s “no external savior” for heavily indebted governments in the 17-nation eurozone and gave no indication the bank is ready to step in and support their finances.

Investors had hoped the ECB would increase its support for financially weak countries such as Italy with bigger purchases of their government bonds once European leaders had agreed to tighten controls of national budgets.

So far, the ECB has made some purchases, but kept them limited, stressing that governments must not rely on such help.

Mr. Draghi said governments had reached a “breakthrough for clear fiscal rules” at last week’s summit, where 26 of 27 EU leaders agreed to seek a treaty toughening the enforcement of rules against excessive national debt and deficits.

But he offered no support for the notion that the ECB might now increase its bond purchases. Instead, governments need to take the tough steps to balance budgets and reform economies to promote growth.

“I will never be tired of saying that the first response ought to emanate from the country,” Mr. Draghi said Thursday at a speech in Berlin. “There is no external savior for a country that doesn’t want to save itself.”

As a “firewall” to calm markets in the meantime, Mr. Draghi said, the EU has its newly strengthened bailout fund.

Mr. Draghi stressed that the purchases were “neither eternal, nor infinite.”

The purchases of the government bonds of Italy or Spain drive up their prices and push down their yields, or interest rates, which move in the opposite direction. The lower yields mean better terms when Italy or Spain sells bonds directly to investors at auctions.

“The crisis has not ended yet. It is now important not to lose momentum and to swiftly implement all those decisions that have been taken to put the euro-area economy back on course,” he said.

Investors were clearly disappointed with the EU summit’s deal last week, with many economists noting it doesn’t address short-term fears about whether governments will be able to borrow at affordable interest rates and pay off maturing debt in the next few months.

The euro has tumbled below $1.30 for the first time in 11 months, stocks have dropped, and the bond yields of Italy - considered the next-weakest link in Europe’s debt crisis - have edged up.

Compounding the Continent’s problems, a spate of bad news on European banks has fueled fears about their ability to survive the debt crisis and raised the prospect of a new global credit crunch.

Five large lenders saw their credit ratings downgraded this week, and a sixth, Commerzbank, saw its stock plunge on speculation it might need more government support. As uncertainty grows that a fellow lender might collapse, banks are cutting back on lending to each other for fear of not getting their money back.

When that credit between banks dries up, loans soon stop flowing to businesses and households, stunting economic growth. On Thursday, the rates banks charge to lend to one another remained at their highest level since September.

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