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European Central Bank to Buy Troubled Governments' Bonds

  • Caroline Arbour

 Mario Draghi, the president of the European Central Bank, Frankfurt, Germany, August 2, 2012.

Mario Draghi, the president of the European Central Bank, Frankfurt, Germany, August 2, 2012.

The European Central Bank has agreed to buy government bonds from debt-ridden Eurozone countries that request help, as part of an effort to relieve pressure from soaring borrowing costs. The much-awaited announcement in Frankfurt Thursday may benefit cash-strapped Italy and Spain, if they agree to the conditions.

European Central Bank President Mario Draghi raised expectations of investors and the governments of Spain and Italy, when he spoke these words in July:

“The ECB is ready to do whatever it takes to preserve the euro," he said. "And believe me. It will be enough.”

In recent months, the crisis-ridden countries of Europe have had to borrow at costs judged unsustainable, with Spanish 10-year bond interest rates hitting a record 7 percent in July.

So all eyes were on the European Central Bank Thursday to see what it would do to bring interest rates down to more acceptable levels and relieve pressure on cash-strapped governments.

The ECB president said the central bank will buy government bonds, with no set limit.

“We expect that the three-year longer-term refinancing operations will provide further support for the further stabilization in financial markets and in particular for lending activity in the euro area,” he said.

If Madrid or Rome want the bank to buy their bonds, they will have to request a bailout - and there will be strings attached and strict budgetary conditions imposed.

The International Monetary Fund will police the new loans.

Draghi said the six members of the ECB’s Executive Board and the governors of the 17 European area national central banks were all in favour of the plan, except for one: Germany.

The Bundesbank (German central bank) said that its chief, Jens Weidmann, "considers these acquisitions as effectively financing governments by printing money.”

The euro dropped in value, but European stocks were buoyed by the European Central Bank’s announcement. Madrid's main (IBEX-35) index closed up almost 5 percentage points.

German Chancellor Angela Merkel was visiting with Spanish Prime Minister Mariano Rajoy in Madrid Thursday.

Angela Merkel only said that the European Central Bank had acted within its mandate.

Mariano Rajoy said he wouldn’t comment on whether Spain would seek a bailout, since he hadn’t yet been able to study the details of the plan.

Earlier this week, the prime minister said he didn’t see the need for new conditions.

Rajoy said again Thursday Spain is committed to the euro and his government will continue doing what it can to keep its deficit in check, while trying to stimulate growth and create employment.

More than 38,000 Spaniards lost their jobs and began claiming benefits in August, the first increase in unemployment in five months.