The European Central Bank (ECB) has announced a plan for a massive sovereign bond buy up, overcoming German opposition to unleash a so-called “big bazooka” against Europe’s debt crisis.
But ECB chief Mario Draghi insists governments also need to do their bit to save the euro.
Draghi set out the plan on Thursday as German Chancellor Angela Merkel and Spanish Prime Minister Mariano Rajoy met in Madrid to dispel fears about a possible break-up of the single currency.
His masterplan is designed to bring down the soaring borrowing costs that crisis-wracked countries say prevent them from getting back on their feet.
He appeared to have convinced investors the scheme could work, as stock markets across Europe jumped and Spanish and Italian borrowing costs tumbled on the news.
In one of the most highly anticipated meetings in ECB history, the bank left its key interest rates at their current all-time lows, as most had expected.
Its main interest rate was left unchanged at 0.75 per cent and the ECB also downgraded its growth forecasts for the 17-nation bloc.
But the focus of markets’ attention was on neither of those, but on Draghi’s new revamped program to buy bonds issued by heavily indebted eurozone countries – a scheme named Outright Monetary Transactions (OMT).
The OMTs will replace the ECB’s previous Securities Market Program or SMP, first launched in May 2010.
The SMP has come under heavy fire, particularly in Germany. Its critics say it blurs the lines between monetary policy, which is supposed to be free from all political influence in the euro area, and fiscal policy.
The head of the German central bank or Bundesbank, Jens Weidmann, kept up his criticism on Thursday.
In a statement, he hit out at the program, saying he “regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy.”
Draghi told reporters there was one “no” vote to the OMT program on the 23-member governing council, saying: “I will leave you to guess who that was.”
But he insisted the new program did not overstep the ECB’s mandate.
The OMTs “will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro,” Draghi said.
“We will do whatever it takes” to keep the eurozone together, Draghi said.
Unlike its forerunner, the SMP, the OMTs would be subject to strict conditions and the ECB was not offering crisis-hit countries a blank cheque, Draghi explained.
Countries wishing to benefit from the OMTs would first have to apply for a bailout from one of the eurozone’s two rescue funds, the EFSF or ESM, he said.
And any such cash from those funds is conditional on governments meeting agreed reform targets.
Leaders of Italy and Spain, the two countries seen most likely to benefit from the prospect of ECB bond purchases and to have recourse to seek such help, welcomed the move.
“Today I have seen an important step forward … which goes towards a more satisfactory governance of the eurozone,” said Italian Prime Minister Mario Monti, adding Italy was trying to avoid seeking help.
Spanish Mario Rajoy, whose country faces 30 billion euros ($A37 billion) in debt repayments in October, brushed aside questions whether it would seek a bailout and ECB help.
However he pledged to “do what it takes to definitively resolve the euro crisis”.
