BRUSSELS, Belgium - December 8, 2011 - The European Central Bank spooked financial markets on Thursday by dousing hopes of dramatic crisis-fighting action in the euro area shortly before European leaders began what the French president billed as a last chance summit.
ECB President Mario Draghi discouraged expectations that the bank would massively step up buying of government bonds if European Union leaders, meeting in Brussels, agreed on moves towards closer fiscal union.
A six-page draft agreement handed to the 27 leaders as they began their two-day summit called for a new “fiscal compact” with much tougher enforcement of budget rules in the eurozone, and a permanent rescue fund brought forward to mid-2012 and armed with a banking license.
But as soon as the draft text leaked, a senior German official rejected key measures including letting the eurozone’s future rescue fund, the European Stability Mechanism, operate as a bank borrowing from the ECB, and a long-term goal of issuing common eurozone bonds.
Draghi said the bloc’s existing bailout facility should remain the main tool to fight bond market contagion, despite its clear limits. It was illegal for the ECB or national central banks to lend money to the IMF to buy euro zone bonds, he said, appearing to veto one firefighting option under consideration.
The ECB did take unprecedented action to support Europe’s cash-starved banks with three-year liquidity and cut interest rates back to a record low 1.0% to counter a forecast Depression brought on by widespread austerity measures.
