* Draghi says ECB will act to save euro
* Euro rises, Bunds fall on hopes of action
* French finance minister welcomes statement
By David Milliken and Olesya Dmitracova
LONDON, July 26 (Reuters) – European Central Bank President
Mario Draghi pledged on Thursday to do whatever was necessary to
protect the euro zone from collapse, including acting to lower
unreasonably high government borrowing costs.
“Within our mandate, the ECB is ready to do whatever it
takes to preserve the euro. And believe me, it will be enough,”
he told an investment conference in London.
“To the extent that the size of the sovereign premia
(borrowing costs) hamper the functioning of the monetary policy
transmission channels, they come within our mandate.”
The comments are Draghi’s boldest to date and suggest the
ECB is ready to row back into the debt crisis to defend Italy
and Spain whose borrowing costs have spiralled to unsustainable
levels.
The euro jumped while German bond futures, typically
favoured by risk adverse investors, turned negative in response.
The ECB has kept its sovereign bond-buying programme
mothballed for months and internal opposition to reviving it is
stiff so focus will turn to what else the ECB could do.
Economists think it could be forced to buy bonds again, or
alternatively, support struggling euro zone countries via the
back door.
On Wednesday, ECB policymaker Ewald Nowotny broke ranks with
his colleagues, saying that giving Europe’s permanent rescue
fund a banking licence so that it could drawn on central bank
funds had merits. Draghi and others have previously rejected
that option.
Alternatively, the bank could act as the Federal Reserve and
Bank of England have, and opt for straight quantitative easing
— money-printing by another name.
“The comments about high government bond yields disrupting
ECB monetary policy transmission are interesting, in so far as
they hint at a possible attempt to circumvent the restrictions
on outright government bond purchases,” said Marc Ostwald,
Strategist at Monument Securites.
“Of course it remains to be see whether Herr Weidmann, Herr
Asmussen, Frau Merkel and Herr Schaeuble would agree with his
assessment,” he said, referring to the senior members of the
German government and its representatives at the ECB.
Draghi said at the weekend that the ECB had “no taboos” over
what it could or could not do. His fears about the failing
transmission of monetary policy chime with similar warnings from
Bank of France head Christian Noyer in recent weeks.
French Finance Minister Pierre Moscovici said Draghi’s
remarks on government bond yields were “very positive”.
Draghi added that the ECB did not want to do things that
should be done by governments. He refused to speculate on the
chance of a country leaving the euro but said that the single
currency was “irreversible”.
