BRUSSELS, Belgium — It was supposed to be big bazooka time. Instead, Super Mario produced a tennis racket.
European Central Bank President Mario Draghi’s latest move in the struggle to save the euro was to knock the ball firmly back into the court of the Italian and Spanish governments.
Draghi held out the prospect of unprecedented, even unlimited, ECB intervention to support Europe's bond markets — and keep the Spanish and Italian economies afloat — if governments meet their commitments to tighten public finances.
But he said the bank would deploy its financial firepower to defend the euro only after they swallow their pride and formally appeal for a rescue that would probably entail even more stringent budget-cutting conditions.
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"Conditionality is essential,” Draghi told a news conference Thursday in Frankfurt, Germany, after an eagerly awaited meeting of the bank’s governing council. “Action by governments is as essential as appropriate action on our side... The ECB can't replace governments.”
Markets were expecting a decisive move toward buying struggling countries’ debt following Draghi's much-hyped pledge last week to "do whatever it takes to preserve the euro." But his latest comments pushed up Spain and Italy's borrowing costs and drove down stock market prices and the euro.
The European currency lost three cents against the dollar even as Draghi was speaking. Madrid's stock market tumbled more than 5 percent and Spain's key 10-year borrowing rate surged over the 7 percent danger point. Italian indicators suffered similar reverses.
Draghi said the ECB council "may undertake open market operations of a size adequate to reach its objective" of saving the euro, adding that the bank will work out the technical mechanisms for "non-standard monetary policy measures" that may be required to repair bond markets over the coming weeks.
That means the bank could use its massive reserves to buy the bonds of troubled countries for bringing down borrowing costs that have threatened to send Italy and Spain the way of bailed-out Portugal, Ireland and Greece.
Rome and Madrid have so far refused to apply for help from the EU's bailout funds and submit to conditions imposed by them.
Asked whether it was impossible for the bank or EU funds to intervene in support of Italy without a formal request from Prime Minister Mario Monti, Draghi responded: "That's exactly the right way to read it."
Monti was meeting his Spanish counterpart Mariano Rajoy in Madrid as Draghi spoke at the ECB’s headquarters. They later dodged questions over any imminent request for help.
"I don't know whether the Italian government will request activation [of the rescue funds]," Monti told reporters. "This is something we will need to examine... one thing is clear, that we will continue doing what we have to do."
Rajoy and Monti praised several elements in Draghi's proposals.
But ominously for hopes of imminent ECB action, Germany's central bank voiced opposition to the possibility the bank would buy troubled countries' bonds even with the conditions Draghi outlined.
Asked about the position of Bundesbank President Jens Weidmann in Thursday's meeting, Draghi said there was unanimity among the ECB governing council, with "one reservation." The ECB's decision-making body consists of the euro zone countries’ central bank heads.
Germans strongly oppose using the ECB’s funds to support struggling southern European countries, which they believe would reward slack finances and risk the euro’s overall stability.
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In a bid to calm markets, Draghi indicated the central bank would address so-called "seniority" issues, indicating it will not insist governments repay bonds bought by the ECB ahead of those held by private investors.
European government officials said Draghi's proposals were expected and would probably pave the way to the ECB’s eventual intervention on bond markets alongside the euro zone's rescue funds, which should have a war chest of 650 billion euros when fully activated.
"What Draghi said is fully rational,” said economist Cinzia Alcidi of the Center for European Policy Studies in Brussels. “In the end, if there is a need, the ECB will intervene to buy bonds. We just need the country in need to apply for it. Maybe with cooler heads tomorrow, the markets will respond better, but we know that markets are not always rational."
As widely expected, the ECB also kept its benchmark euro zone interest rate at the record low of 0.75 percent, after ignoring pressure for a further cut to inject more demand into the economy. The bank brought the rate down from 1 percent last month.