BERLIN – Europe’s most powerful banker made an extraordinary pledge Thursday to do “whatever it takes” to defend the troubled euro currency, sparking a rally in world stock markets on the prospect of help from the almost unlimited resources of the European Central Bank.
In a speech in London, ECB chief Mario Draghi said the words that many worried European officials had longed to hear: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. . . . Believe me, it will be enough,” he said, according to wire reports.
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.
“Today was a preemptive oral intervention,” said Jacob Kirkegaard, a research fellow at the Peterson Institute for International Economics. “These high spreads can easily be defined to be within the ECB’s mandate.”
The bank has been reluctant to overload its balance sheets with bonds issued by faltering governments, and some analysts have raised questions about whether the bank’s actions actually dissuade private investors, since the bank insists on being paid back in whole even if a government defaults on privately held debt.
Draghi’s remarks may also have been intended to warn off investors from driving up Spain and Italy’s interest rates. And he may be waiting for Spain and Italy’s situation to get even worse before he steps in. The ECB will announce its August interest-rate decision next week. The central bank cut interest rates in July, but borrowing costs for Italy and Spain soon went up, not down.
The euro rose against the dollar following Draghi’s comments Thursday, to above $1.23 in afternoon trading from $1.22 late Wednesday.
Spain is to receive a limited bailout, targeted to its banking system, of $123 billion, but its borrowing costs have been rising to the danger zone that forced Greece, Ireland and Portugal to seek full-blown bailouts.
But those countries are small; Spain, the euro zone’s fourth-largest economy, would cost far more to rescue, and it is not clear whether Europe’s bailout funds have the resources to aid both Italy and Spain at once, should that become necessary.
A permanent $614 billion bailout fund that was supposed to be ready by July has been held up while Germany’s constitutional court reviews its legality. A decision is unlikely before mid-September.
ECB governing council member Ewald Novotny of Austria suggested Wednesday that the permanent bailout fund could take out a banking license, allowing it to borrow money from the ECB. That move remains controversial, especially in Germany, where many feel it pushes too far beyond the central bank’s mandate. Nevertheless, Novotny’s comments — coming on behalf of a country that has traditionally allied itself with fiscal hawk Germany — suggest new flexibility from the central bank.
Before Draghi’s comments, the euro zone had appeared increasingly brittle in recent days.
Citibank analysts Thursday published a report saying Greece stands a 90 percent chance of leaving the euro zone within the next year and a half.
Plumer reported from Washington.