FRANKFURT (MNI) – European Central Bank President Mario Draghi on
Thursday dampened expectations that the ECB would take any big steps to
stabilize sovereign bond markets if EU leaders agree new fiscal rules at
their summit Thursday and Friday.

Draghi said that comments made in a speech last week had been
mis-interpreted. He also criticized suggestions that the ECB could lend
the IMF money to buy Eurozone government bonds, and he further expounded
on his vision of a new ‘fiscal compact’ to restore confidence, lending
his weight to calls for changes to the EU treaty.

“I was surprised by the implicit meaning given in much of the press
to my statement that ‘other elements will follow'”, Draghi said,
referring to a speech he gave at the European Parliament last week,
which was widely interpreted as suggesting that the ECB would step up
its bond purchases to keep a lid on sovereign borrowing costs if EU
leaders agreed to tough new fiscal and economic rules.

“A new fiscal compact in the form of a fundamental restatement of
fiscal rules is the most important precondition for restoring the normal
functioning of the financing markets,” Draghi said at the ECB’s monthly
press conference.

Expanding on his vision of a ‘fiscal compact,’ Draghi said it
should be understood as a “three pillars concept.”

“The first pillar is national economic policies geared toward
fiscal stability, growth, competitiveness and thereby job creation,” he
said.

Adding his weight to a push by Germany and France for new fiscal
and economic rules to be written into the EU’s treaty, The ECB president
said that “the second pillar is rules at EU level, fiscal rules
enshrined in primary legislation.” Such rules should be “automatic” he
said, because ex-ante fiscal rules would “increase confidence in this
redesign of the fiscal compact” more than ex-post rules in secondary
legislation.

In addition to the credibility and strength of the legal rules, it
is also essential to have “something that is going to be in place soon,”
the ECB chief urged.

The third pillar in Draghi’s compact is “stability mechanisms,”
Draghi said, though he noted that these are fundamentally the result of
a lack of confidence in the first two pillars.

Draghi said his preference was for the EFSF and ESM to be fully
equipped and running as soon as possible.

The ECB President also downplayed the idea that the ECB could
circumvent its prohibition on the monetary financing of Eurozone
governments by lending instead to the IMF to support EMU governments
that are under market pressure.

“The mechanism by which money is being channeled to the European
countries should not obscure the fact that we have a treaty which says
no monetary financing to governments,” Draghi said.

Although “very complex” from a legal point of view, “there should
be this respect for the spirit of the treaty always in our minds,” he
said.

“If national banks lend to the IMF and the IMF then lends to
Indonesia or China, that’s fine. If the IMF were to use this money
exclusively to buy bonds in the euro area then this is not compatible
with the treaty,” he said.

–Brussels Newsroom, +324-952-28374; pkoh@marketnews.com

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