Frankfurt

Spread drops as Draghi outlines bond-buying plan

'Fully effective backstop' says ECB chief

Spread drops as Draghi outlines bond-buying plan

(ANSA) - Frankfurt, September 6 - The spread between Italian and German bonds narrowed Thursday as markets cheered a bond-buying plan designed by the European Central Bank to lower borrowing costs for troubled states. The program provides a "backstop" that will allow the central bank to deal with market distortions driven by fear, ECB President Mario Draghi said at a news conference. His words had a quick and dramatic effect on markets. As he spoke, the spread between Italy's 10-year bond and the German Bund - a reflection of investor confidence - fell to 378 basis points with a yield of 5.33%. At some of Italy's worst moments in the current sovereign-debt crisis, the spread had topped 500 basis points. Draghi said ECB policy-makers agreed on an unlimited bond-purchase program in order to better manage interest rates in the euro area and provide some protection for the common currency by countering financial-market speculation about the euro's future. The program "will enable us to address severe distortions in government bond markets, which originate from....unfounded fears on the part of investors of the reversibility of the euro," Draghi told reporters. "Under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios." The "appropriate conditions" clause tells governments in troubled countries, including Italy and Spain, that they must request assistance under the program and live with whatever stringent conditions may be imposed. That means ECB bond purchases would be conditional on governments signing up to a European Financial Stability Facility or European Stability Mechanism programme. "Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial-market circumstances and risks to financial stability exist - with strict and effective conditionality," Draghi said. Under the program, Draghi said the central bank could potentially buy an unlimited amount of eurozone sovereign debt with maturities of between one and three years. The ECB has been sharply divided on the bond-purchase program. In the face of Draghi's determination to protect the euro, Germany's Bundesbank has harshly criticized his bond-purchase plan. Draghi alluded to that in his news conference, telling reporters approval of the new program was not unanimous. "There was one dissenting view," said Draghi, who also held the ECB's key lending rate unchanged at 0.75%.

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