Speaking at a conference in London marking the start of the Olympics, the president of ECB Mario Draghi announced a strong message of support to the Euro, saying “within our madnate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
His message prompted a rally in the European share prices and the Euro.
In Spain, the Ibex share index closed up 6%, while in Italy, the main share index closed up 5.6%.
The comments also triggered a fall in bond yields. Spain’s 10-year yield, which had hit a record high of 7.6% earlier, fell back to 6.8%.
Bond yields are an indication of the interest rate a country would have to pay to borrow money. A rate above 7% is generally seen as unsustainable in the long run.
“Mr Draghi argued that dealing with high bond yields is the ECB’s business, if they start to interfere with the bank’s monetary policy and its core task of trying to keep inflation low.
The financial markets have taken this as a hint that the ECB could resume its programme of buying sovereign bonds to try to drive down yields, and to defend Italy and Spain.
The bond-buying programme is controversial. There are those, in the German economic establishment in particular, who argue that it takes the ECB too close to lending money directly to member states, something the Bank is not allowed to do.
So it is likely that Germany and others would only allow bond-buying to resume if it were strictly limited.
Are there other options being discussed?
Well, one senior ECB policymaker suggested this week that the eurozone’s new bailout fund could be given a banking licence so it could borrow money from the ECB, and then help out struggling governments itself.
That too remains a very contentious idea. But Mr Draghi has now raised market expectations. And, if nothing changes, the backlash could be rather painful.” Europe correspondent, Chris Morris.