Draghi: I will bail out banks but not states

 
Tim Wallace
Follow Tim
THE EUROPEAN Central Bank (ECB) cut interest rates to record lows and vowed to step up efforts to keep banks afloat – but will not fulfil hopes that it will bail out indebted governments, bank boss Mario Draghi (pictured) announced yesterday.

Acknowledging the credit crunch sweeping the Eurozone, banks can now access unlimited amounts of liquidity for three years, not the previous maximum of 12 months, and collateral with lower credit ratings will now be accepted in return.

Eurozone banks now have more liquidity support than the Bank of England or the Fed offers, helping prop up the embattled institutions.

However, stocks dropped and peripheral bond yields shot up as markets feared the latest rescue plan was in tatters.

Eurozone leaders had hoped that measures to force profligate governments into controlling their finances would give the ECB confidence to buy bonds and support the governments through a difficult transition period.

Instead, Draghi explained he was not in a position to fund governments in the way politicians want – the ECB be will become lender of last resort to banks, like the Bundesbank, but not to governments.

He also ruled out lending to the IMF, which could in turn help euro states.

“If the IMF were to use this money exclusively to buy bonds in the Eurozone, we think it is not compatible with the treaty,” he explained.

Economists fear disaster will ensue.

“It is only the expectation of aggressive ECB bond buying – or some form of commitment in that regard – that has been preventing the complete meltdown of European financial markets,” said Dario Perkins from Lombard Street Research.

Investors fled risky assets, leaving stocks and weak governments’ bonds, moving to gilts, bunds and Treasuries.

The CAC40 plunged 2.53 per cent and the DAX fell 2.01 per cent. Yields on Italian ten-year bonds ended 0.467 percentage points higher, at 6.458 per cent and Spanish yields rose 0.383 percentage points to 5.814 per cent.