UPDATE 1-If Italy wants ECB help, it needs a bailout first: Draghi
(Writes through)
By Francesco Canepa and Balazs Koranyi
FRANKFURT, Oct 25 (Reuters) - Italy would need to secure a bailout from the European Union if it is to receive any help from the European Central Bank to bring down its borrowing costs on financial markets, the ECB’s President Mario Draghi said on Thursday.
The European Commission rejected Italy’s draft 2019 budget this week, saying it brazenly broke EU rules on public spending, and asked Rome to submit a new one within three weeks or face disciplinary action.
Draghi, himself an Italian, reaffirmed he was “confident” that Rome would eventually reach an agreement with the Commission and end a standoff that has sent investors fleeing Italian bonds.
But, confirming what sources had told Reuters earlier this month, Draghi added the ECB would come to Italy’s rescue if the country subscribed to an adjustment programme with the European Stability Mechanism (ESM) - political parlance for a bailout with strict policy prescriptions.
This would clear the way for the ECB to buy Italian bonds on the market via so called Outright Monetary Transactions (OMT) - a tool announced at the height of the debt crisis in 2012 and yet unused.
“What is available for the ECB towards a specific country is OMT,” Draghi told a press conference after a meeting of the ECB’s policy-making Governing Council.
“And the OMT is subject to having a programme with ESM and is also subject to the assessment by the Governing Council that the undertaking of the OMT doesn’t prejudge the monetary policy for the whole of the euro area,” he added.
Italy’s bond yields hit a 4-1/2 year high last week as investors worried that the row between Rome and the Commission might eventually push the euro zone’s third-largest economy outside the currency bloc.
Italy’s European Affairs Minister Paolo Savona said earlier this month he was confident that, if necessary, Draghi would “take care of things” and “prevent another grave crisis in Europe”.
But Draghi stressed it wasn’t the ECB’s job to bankroll governments.
“Our mandate ... is a mandate towards price stability, not towards financing governments’ deficits or adhering to a fiscal dominance situation,” he told the news conference.
The ECB’s goal is keeping inflation in the euro zone close to, but below 2 percent a year.
With Draghi seeing “limited” spillover to other countries’ bonds from the Italian rout, the ECB confirmed on Thursday its plan to end its 2.6 trillion euro bond-buying programme at the end of this year and raise interest rates for the first time since 2011 sometime after next summer.
Draghi warned that the sell-off in Italian government bonds was set to dent the capital of the country’s banks, which own some 375 billion euros worth of that paper.
But the central banker also sought to strike a constructive tone on the Italian situation. He quoted European Commission Vice President Valdis Dombrovskis, who was also at the ECB meeting, as saying: “We have to observe and apply fiscal rules. But we are also seeking a dialogue.” (Editing by Hugh Lawson and Catherine Evans)
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