ECB’s Draghi urges swift action on bailout fund

The ECB’s new governor, Mario Draghi, has called on governments to implement their decisions

18 November 2011 Last updated at 15:30

The new governor of the European Central Bank (ECB), Mario Draghi, has called for “urgent action” to implement the new eurozone bailout fund.

His comments come as the Italian parliament gave its approval to the new government led by economist Mario Monti.

The new Greek government also published its budget plans for 2012.

After a turbulent week, markets remained wary of developments with share indexes seeing mixed trading.

By early afternoon on Friday the Dow Jones index in New York was up 0.4% after worries about the eurozone prompted a sharp fall on Thursday.

However other US and European markets remained down or unchanged as investors waited to see how the latest political developments affected efforts to solve the eurozone crisis.

Bond markets – which set the cost of borrowing for governments – were also calmer, with the interest on Italian and Spanish government debt falling slightly.
Action call

Speaking in Frankfurt, Mr Draghi expressed impatience with the lack of progress by European leaders.

“Where is the implementation of these long-standing decisions? We should not be waiting any longer,” he said at Friday’s European Banking Conference.

In his speech, Mr Draghi suggested the ECB’s main job remained to ensure long-term low inflation.

“Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term,” he said.

He called for governments to play their role in tackling the debt crisis through “solid public finances and structural reforms”, as well as reforms to the way the eurozone works.

Investors and the ECB are awaiting details of how the size of the eurozone bailout fund – the European Financial Stability Facility – will be boosted to 1tn euros (£855bn; $1.3tn).
Bond falls

In the meantime, traders have looked to the central bank to ensure the cost of borrowing to Italy and Spain does not rise too high.

If interest on the debt issued by Italy and Spain becomes too high then their debt repayments could become unsustainable, triggering an economic crisis.

Reported intervention by the ECB to buy Italian and Spanish government bonds on Friday helped keep bond yields from rising further.

By early afternoon Spanish 10-year bonds were yielding 6.35% while Italian 10-year bond yields were at 6.67%.

On Thursday, Spain’s borrowing cost at an auction of 10-year bonds was almost 7%, which is a level seen as unsustainable.

Spain is currently preparing for a general election which is expected to herald a change in government.

In Italy, new Prime Minister Mario Monti has now won confidence votes in both houses of parliament for his new government including bankers, CEOs and university professors.

And in Greece, the government of former central banker Lucas Papademos has passed its first budget promising to reduce the deficit without further austerity measures.
ECB role

Earlier in the week, the head of the Bundesbank – Germany’s central bank, which is officially subordinate to the European Central Bank – openly opposed the ECB coming to the rescue of troubled Italy and Spain.

German Chancellor Angela Merkel reinforced that stance on Thursday: “If politicians think the ECB can solve the euro crisis, then they are mistaken”.

Mr Draghi’s speech appears to support her position.

Many analysts believe that to stem contagion in the eurozone the ECB should act as “lender of last resort” and commit to buy up unlimited amounts of Italian and Spanish debt, instead of the limited interventions it has been carrying out so far.

France, whose AAA credit rating has come under pressure, has called for the ECB to take stronger action.

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