European Central Bank head Mario Draghi says the bank is ready to intervene in the bond market to drive down countries' high borrowing rates, and urged European leaders to get their bailout fund ready to intervene as well.
Draghi said Thursday the bank could buy bonds if the borrowing rates stop the ECB in its efforts to spread its low interest rates throughout the 17 countries that use the currency.
Such a move could, crucially, lower the borrowing rates that are threatening to push Spain and Italy into financial disaster.
The ECB "may undertake outright open market operations of a size adequate to reach its objective," Draghi said.
Draghi announced no immediate action. "Over the coming weeks, we will design the appropriate modalities for such policy measures."
The words about adequate size appeared to address concerns that an earlier ECB intervention was not big enough to impress bond markets. That effort began in May 2010 and has been left unused since March after it did not decisively lower borrowing costs.
Financial markets appeared unimpressed by Draghi's comments that the bank was preparing a new approach to get a grip on Europe's debt crisis.
Before Draghi's statement, stocks and the euro were buoyant. As he spoke they both went into reverse.
In Europe, Germany's DAX was down 1.4 percent at 6,657 while the CAC-40 in France fell 1.3 percent to 3,278. The FTSE 100 index of leading British shares was down 0.7 percent at 5,675.
The euro was 0.2 percent lower at $1.2215.
In his comments, Draghi was careful to add that the bank would be acting independently to determine monetary policy and interest rates. It is forbidden by the EU treaty from using its monetary powers just to support government finances.
He said the eurozone governments "must stand ready" to use their bailout funds, the European Financial Stability Fund and its successor, the European Stability Mechanism, in direct market interventions themselves. Countries would have to ask for that help first, which would take time, while the ECB can act at any time.
The bailout funds could play a key role because they can enforce tough conditions in return for help, such as further economic reforms. That way the bond market intervention could take pressure off governments while not undermining governments' resolve to cut their deficits and clear away regulation that slows growth and makes debt harder to pay.
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