The promise immediately renewed hopes for saving the 17-nation European currency bloc, and sent markets soaring — the Dow Jones industrial average closed up 1.67 percent, Germany’s DAX rose 2.75 percent and Spain’s IBEX 35 closed up 6.06 percent.
More significantly, yields fell on Spanish and Italian government bonds, a relief from the dangerously high levels they had hit in recent days. Bond yields are the cost governments have to pay to borrow money, and unsustainably high rates could push the nations to seek costly bailouts from the rest of the euro zone, as happened with Greece, Portugal and Ireland.
Draghi has been reluctant to commit to sweeping action, telling European leaders in recent months that they could not rely on the bank to intervene in bond markets to push down borrowing costs. But the combination of progress toward a banking union at a June summit and rapidly rising rates on Spanish and Italian debt seem to have led Draghi to at least raise the possibility that the bank is prepared for further action.
In theory, the ECB could step in to ease the debt problem with the unlimited supply of euros at its disposal — basically, it could print money. If Draghi promised to do whatever it takes to backstop Spain’s debts, for instance, investors would be more confident and stop demanding such high interest rates. Relief from the immediate pressure of debt burdens could give Spain and Italy breathing room to address their budget woes, and it would clear space for the politicians of the euro zone to focus on reforming the troubled currency union.
Draghi and the ECB have been reluctant to go this route, and German leader Angela Merkel has been against the idea of the bank intervening in debt markets. Putting more euros into the economy by purchasing bonds could drive up inflation, and backstopping Spanish and Italian debt could create a “moral hazard,” meaning the nations would feel less pressure to budget responsibly.
Draghi’s comments Thursday were notably short on specifics, and this is not the first time he has sparked markets with broadly reassuring comments. Last year, for instance, he dangled the possibility of increased bond purchases if governments moved toward a stronger fiscal union.
Many analysts took his Thursday comments to mean a potential reactivation of a bond-purchasing program that snapped up more than $260 billion in bonds between 2010 and the early part of this year, helping to drive down yields.