European Central Bank president Mario Draghi abandoned his usual public reserve and surprised the markets with a passionate defence of the euro, calling the currency union “irreversible” and vowing to do whatever is necessary to safeguard its future.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Mr. Draghi told a London investment conference Thursday. “And believe me, it will be enough.”
He also signalled possible intervention to halt the market assault on Spanish and Italian government bonds, whose soaring yields make debt refinancing prohibitively expensive, increase the chances both countries will need full-scale bailouts and put the monetary union at grave risk.
Mr. Draghi said the widening yields on sovereign debt undermine the efforts of banks to maintain low borrowing costs across the euro zone. As such, “they come within our mandate.”
By framing the bond crisis this way, the central bank would give itself a free hand to launch aggressive quantitative easing, buying distressed government bonds in the market and driving down yields.
His remarks sparked a global equity rally, bolstered the flagging euro and took some pressure off Spanish and Italian bonds.
But skeptical analysts warned the markets might be reading too much into the efforts of Mr. Draghi, noting that the ECB has shown little stomach for a bold expansion of its limited role as the nearly three-year-old debt crisis has gone from bad to worse.
“Well, who would have expected him to say otherwise?” said Carl Weinberg, chief economist with High Frequency Economics.
Now the question is whether Mr. Draghi and the other members of the normally ultra-cautious ECB governing council will back up the fighting words with concrete action.
Mr. Draghi and other key bank officials have repeatedly argued that the crisis requires a political solution and that the central bank has neither the power nor the capacity to become a lender of last resort to governments that mismanage their fiscal affairs.
But there are signs the ECB may be shifting away from its hard line as worries about the euro’s future mount.
A day before Mr. Draghi’s comments, council member Ewald Nowotny, governor of the Austrian central banker, mused about a banking licence for Europe’s permanent rescue fund, which does not yet exist.
This would allow the €500-billion fund to tap the ECB for unlimited financing, rather than going to member governments or tapping the bond market to boost its firepower.
Other senior officials, including Mr. Draghi, have previously opposed such a measure. But they have also rejected requests to resume direct bond purchases. The ECB began buying Italian and Spanish debt in the secondary market last summer, but stopped the program in March.
The Moody’s warning on Monday that Germany and other strong euro zone members face growing risks to their own fiscal health from the worsening crisis might have spooked ECB officials. If investors lose confidence in German bonds as a haven for their euro holdings, the currency would get hammered.
But even if the ECB were to resume buying Spanish and Italian debt in the secondary market to stabilize prices and cap borrowing costs, as numerous euro zone officials and analysts have been urging, doubts remain about the central bank’s ability to arrest the crisis.
“We doubt very much it marks a watershed in the crisis,” John Higgins, senior markets economist with Capital Economics in London, said in a note.
“The fiscal problems of Spain and Italy are likely to necessitate full-blown sovereign bailouts. Not only is the required size of these operations far in excess of what the ECB would probably be prepared to commit to bond purchases, but the bank itself remains ideologically opposed to monetary financing of sovereign debt.”