FRANKFURT (MNI) – Eurozone countries like Spain and Italy, which
are facing soaring borrowing costs, will first need to apply for
assistance from bailout funds and agree to their conditions before the
European Central Bank will consider intervening in their bond markets,
ECB President Mario Draghi said on Thursday.

“First governments have to go to the EFSF because, as I have said
several times, the ECB cannot replace governments or the actions that
other institutions have to do on the fiscal side,” Draghi told
journalists after the Governing Council meeting here.

An agreement with the EFSF would be a “necessary but not sufficient
condition” for ECB intervention, he said.

The ECB may be prepared to purchase government bonds because the
“severe malfunctioning in the price-formation process of bond markets”
is “hindering the effective working of monetary policy,” he explained.

Draghi said the “exceptionally high risk premia” in several
government bond markets were caused by investors’ fears over the future
of monetary union. Such fears are “unacceptable and need to be
addressed in a fundamental manner,” he said, asserting that “the euro is
irreversible.”

The guideline for future bond purchases announced today differs
from the ECB’s previous programme, the Securities and Markets Programme,
because it has “explicit conditionality,” he stressed.

Under the EFSF guidelines agreed by EU leaders last November, the
bailout fund can be authorized to purchase government bonds in secondary
markets to help countries under speculative attack subject to
conditions, including an analysis by the ECB demonstrating the existence
of “exceptional financial circumstances” that pose “risks to financial
stability.”

Countries must also formally request the intervention of the EFSF
and agree to “appropriate policy reform efforts”.

Spain and Italy, the two countries most at risk from high borrowing
costs, have so far shied away from requesting EFSF bond market
intervention because they are wary about additional EU oversight and of
being lumped together with countries such as Greece, Ireland and
Portugal, which have full-scale bailout programmes.

According to the EFSF’s guidelines, countries requesting
intervention must have “a sustainable public debt” and a “sustainable
external position” and be able to demonstrate commitment to bringing
economic imbalances under control. In addition, they must have “an
absence of bank solvency problems that would pose systemic threats to
the euro area banking system stability.”

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

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