Draghi nudges Spain to take up bond plan

Oct 04, 2012, 11:58 AM EDT
President of the European Central Bank, ECB, Mario Draghi smiles as he arrives to attend the annual meeting of the Umbrella Association of German Industry, BDI, in Berlin, Germany, Tuesday, Sept. 25, 2012.
(AP Photo/Michael Sohn)

FRANKFURT, Germany (AP) — European Central Bank President Mario Draghi nudged Spain and its European partners to take up bank's offer of help with the country's high debt costs, reassuring Madrid that the conditions for getting the assistance "don't need to be punitive."

The ECB chief said at a news conference in Brdo Pri Kranju, Slovenia, Thursday that Spain had made "significant progress" toward getting its finances under control, adding that a number of measures had been "announced, legislated, and implemented" in only a short period of time.

Draghi however, said it was up to Spain to decide whether to seek help.

Also Thursday, the ECB also left its key interest rate for the 17 countries that use the euro unchanged at a record low 0.75 percent. That underscored the bank's message that it had already taken steps to rescue the euro from collapse — and that now it's up to governments to act.

At its last policy meeting on September 6, the ECB said it would buy unlimited amounts of government bonds to help lower borrowing costs for countries such as Spain or Italy, which are struggling to manage their debts. To get help from the ECB, a country must first ask for assistance from the rest of the eurozone by approaching the bloc's emergency fund, the European Stability Mechanism, and agree to tight spending and reform measures.

Spain's Prime Minister Mariano Rajoy is holding off asking for help out of concern that Spain may be slapped with harsh austerity conditions from the eurozone. Spain is at the center of the eurozone crisis — its €1.4 trillion ($1.8 trillion) economy is the fourth-largest among the 17 countries that use the euro. Markets have calmed after the ECB offer of bond purchases. But Spain's delay has started to unnerve markets again, and the country's borrowing costs have crept back up.

Draghi told the news conference that the conditions a country would have to agree on "don't need to be punitive," and could include measures to ease rules and regulations to boost growth in the economy over and above painful cuts in spending.

In the past week, Spain has announced an austerity budget for 2013 that would cut overall spending by €40 billion. It has already introduced several packages of tax hikes, civil servant wage cuts and freezes in a bid to get out of the crisis. Analysts say the Spanish government hopes the budget would be enough to stop the eurozone from imposing further spending and deficit controls if and when Spain asks for help with its bonds.

Draghi nonetheless declined to comment on whether Spain had to ask for help or could make it without added loans and bond purchases. "The decision to start this process is entirely in the hands of governments," he said.

The bank had already provided "a fully effective backstop" with the bond purchase offer, he added.

The ECB, Draghi said, had already "done what is necessary" by offering to buy countries' bonds on the secondary market, lowering their interest rates — if governments agree with the other 16 countries that use the euro on steps to improve their finances.

European stock markets were broadly unchanged on the announcement of the ECB's decision, with the Stoxx50 index of leading European shares down 0.14 percent at 2,541. The euro, meanwhile, was up against the dollar at $1.3007. The interest rate on Spain's 10-year bond was 5.89 percent on Thursday, up 0.11 percentage points on the day. This compares with more than 7 percent before the ECB plan was announced.

In addition to suspense over Spain, the eurozone is troubled by weak prospects for economic growth. The eurozone shrank 0.2 percent in the second quarter and is in danger of shrinking again in the third quarter. Draghi said he expects growth "to remain weak in the near term and recover only gradually thereafter."

Analysts were also pessimistic on the prospects for growth in the eurozone. "There remains significant downside risk to the euro area's economic outlook. Indeed, with no sign that the recession is over, further easing is likely in 2013," said Benjamin Reitzes, an analyst at BMO Capital Markets.

The bank held off from cutting its key interest rate again. In theory, that would boost the economy by making it easier for businesses to borrow and expand. But rates are already low and business borrowing remains weak because many managers see no prospect of expanding sales.

The ECB must also keep an eye on inflation, which remains stubbornly above its goal of just under 2 percent. The annual rate was 2.7 percent in September.

European governments have already had to bail out three countries — Greece, Ireland and Portugal — when they could no longer borrow at affordable costs and keep servicing their debts.

Cyprus has also asked for a bailout and Spain has received a commitment of up to €100 billion to repair its shaky banks which suffered heavy losses on real estate loans.