- Associated Press - Thursday, August 2, 2012

FRANKFURT, Germany — The European Central Bank is preparing to unleash its financial might and buy government bonds to help drive down borrowing costs in debt-ridden countries like Spain and Italy, caught in the grip of what president Mario Draghi called a “worsening crisis.”

Mr. Draghi urged leaders of the 17 countries that use the euro to use their bailout fund to take the same action, sending a clear message: Europe’s financial crisis requires more forceful remedies than leaders have so far been able to muster.

The move toward bond buying came a day after the Federal Reserve hinted it was leaning toward further action to stimulate U.S. growth, highlighting the growing pressure on central bankers to rescue weak economies across the globe.

Financial markets were disappointed by the lack of immediate action and that the bank had few specifics to offer on the bank’s emerging plan to save the euro. Stocks were sharply lower across Europe, while borrowing costs crept higher for the eurozone’s financially strapped countries.

Mr. Draghi said ECB policymakers will work on a more detailed plan in coming weeks, including how much money to put into the effort to lower interest rates on governments’ short-term bonds. The bank would hope for better results than an earlier bond-buying effort that had only limited impact.

Mr. Draghi’s remarks came during a press conference that followed a bank decision to keep its benchmark short-term interest rate unchanged at a record low 0.75 percent.

“There wasn’t any specific instance that led us to the decision we had today, just a sense of the worsening crisis and the worsening consequences,” he said.

He said the recent spike in interest rates for the short-term bonds of countries such as Spain and Italy was a symptom of larger stresses across the region, which faces slower growth and rising unemployment.

Negative reaction in the markets was strongest in Spain and Italy, the third- and fourth-largest economies in the eurozone and the countries most vulnerable to high borrowing costs. The interest rate, or yield, on Spain’s 10-year bonds rose above 7 percent, while the country’s main stock index plunged by nearly 5 percent. The yield on Italy’s 10-year bonds climbed above 6 percent and the country’s main stock market index sank by more than 4 percent. The euro fell 0.2 percent to $1.2215.

In the U.S., the Dow Jones industrial average fell 144 points to 12,827.

Financial markets in the U.S. and Europe had risen last week after Mr. Draghi gave a speech in London that many investors interpreted as a signal that the bank would take decisive action.

Yet help is not automatic. Countries would have to ask for that help first from the European Financial Stability Fund and its successor, the European Stability Mechanism. Member governments must agree, and recipients of help must agree to tough reform conditions to get the money.

“The ECB disappointed those who had hoped for the Big Bertha to fire immediately,” said Joerg Kraemer, chief economist at Commerzbank, referring to the super-heavy artillery Germany used in World War I.

“Instead, the ECB wants the problem countries to first turn to the … bailout fund.”

In the U.S., the Fed said in a statement that it would closely monitor economic data to determine whether and when to take additional steps.

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