ECB raises pressure on Spain and Italy to take bailouts

SPAIN AND Italy face renewed pressure to accept euro zone bailouts after European Central Bank president Mario Draghi made this a precondition of bond market intervention to drive down their borrowing costs.

The euro dropped in trading yesterday afternoon after Mr Draghi dashed market expectations that his promise last week to do “whatever it takes” to stabilise the euro would translate into an immediate reactivation of ECB bond-buying.

In a statement after its meeting yesterday, the ECB’s 23-member governing council conceded that “severe malfunctioning” in euro zone bond markets was “unacceptable”. However, rather than agreeing to a swift market intervention, the bank postponed a decision “for a few weeks”.

Meanwhile, Mr Draghi dismissed as “incorrect” a report in Der Spiegel that he asked ECB governors to consider a solution to Ireland’s banking debt issue that went beyond a “purely legal discussion”.

As expected, the Frankfurt bank left its key interest rate unchanged yesterday at 0.75 per cent.

At a closely watched press conference in Frankfurt yesterday, Mr Draghi said the bank “may undertake outright open-market operations” large enough to drive down to acceptable levels “exceptionally high risk premia” on unnamed countries’ sovereign debt.

The bank would only consider this step, he said, if governments activated euro zone bailout funds “with strict and effective conditionality”.

The announcement appears to dash hopes of Spain and Italy for no-strings-attached financial assistance from euro zone partners.

“The first thing a government has to do is go to the EFSF [European Financial Stability Facility bailout fund],” said Mr Draghi. “The ECB cannot replace action from governments or that other institutions have to do on the fiscal side.”

Italian prime minister Mario Monti, in Madrid yesterday, said Italy’s finances were solid and would not require a sovereign bailout.

Spanish prime minister Mariano Rajoy, when asked three times directly if he would request a bailout to allow a debt buy-up, merely praised the ECB’s decision to consider returning to so-called non-conventional measures.

Spanish bond yields, after easing off in recent days in anticipation of assistance from Frankfurt, rose again yesterday beyond the 7 per cent rate considered unsustainable.

In a second setback for euro zone crisis countries, Mr Draghi said it was legally impossible for the European Stability Mechanism bailout fund to be granted a banking licence in its current form, allowing it to tap the ECB for potentially unlimited financing. “It is not up to us to give a banking licence to the ESM, it is up to governments,” he said.

Mr Draghi said the ECB governing council had instructed bank technical committees to produce “appropriate modalities” for bond-buying that would restore stability to markets while staying within the bank’s mandate of maintaining price stability and a ban on state financing.

Mr Draghi indicated that even this preliminary move was opposed by the German Bundesbank.

“It’s clear and it’s known that the Bundesbank have their reservations about the programme of buying bonds,” said Mr Draghi.

Separately, Irish Government figures published yesterday showed tax revenues for the first seven months of the year came in €500 million ahead of target at €20.3 billion, in keeping with the positive trend of recent months.

The tax take at the end of July was €1.68 billion, or 9 per cent, above the amount collected in the same period last year. Income tax, VAT and corporation tax returns are all ahead on the same period in 2011, leaving the exchequer deficit at €9,126 million.