ECB ready to buy bonds of troubled eurozone governments, says Draghi

THE EUROPEAN Central Bank’s incoming president signalled yesterday that the bank stood ready to carry on buying the bonds of troubled eurozone governments, suggesting he is ready to intervene to steady markets in the face of German misgivings.

Mario Draghi also said the 17-nation euro area faces significant growth risks, a comment that hints he may be ready to support a cut in interest rates soon after he takes over from Jean-Claude Trichet next week.

The Italian made the comments as European leaders headed to Brussels for a crunch summit aimed at getting a firm grip on the eurozone debt crisis, with France and Germany at odds over how much the ECB should be involved.

“The eurosystem is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission,” Draghi said in Rome.

The ECB’s non-standard policy measures (the crisis response it has rolled out on top of interest rate policy moves) have also included the provision of unlimited liquidity to banks, and purchases of covered bonds.

In his Rome comments, Draghi used language similar to that employed by the ECB to explain the reactivation of its bond-buying programme in August, when it said the programme was aimed at “restoring a better transmission of our monetary policy decisions taking account of dysfunctional market segments”.

The central bank launched its bond-buying plan in May last year, intervening in debt markets to lower the borrowing costs of countries snared by the debt crisis that has since escalated and now risks tipping the world’s leading economies into recession.

The decision to reactivate the programme in August and buy the bonds of Italy and Spain came after they appeared to be getting dragged into the debt crisis.

The decision was far from unanimous, however, and led to the resignation of Juergen Stark — the second heavyweight German policymaker to quit the ECB this year over the plan.

Bundesbank chief Axel Weber, who had been in pole position to succeed Trichet, departed in April and in doing so opened the way for Draghi to take the ECB presidency.

Draghi’s comments set him apart from Trichet and opened the way for continued ECB bond-buying, though the Italian said it is up to governments to deal with the roots of the crisis.

Trichet had signalled that the central bank was looking to withdraw from the bond-buying policy once the eurozone’s EFSF rescue fund gained new powers to intervene on bond markets.

Draghi’s succession to the ECB presidency coincides with other key personnel changes at the bank and the arrival of new, younger policymakers with a more pragmatic approach than some of their predecessors. This may see the ECB become less inflexible.