The European Central Bank (ECB) yesterday unveiled plans to restart buying government bonds in a move aimed at cutting high borrowing costs faced by distressed euro-zone nations.
In a sign of the deepening turmoil enveloping the single-currency area, the ECB also trimmed its economic forecasts for this year and next.
"We are in a situation now where you have large parts of the euro area in what we call a bad equilibrium," said Mario Draghi, the bank's president, announcing the plan.
"You may have self-fulfilling expectations that feed on themselves and generate very adverse scenarios. This would justify the intervention of the central bank."
Mr Draghi fleshed out more details of the bond-buying programmethe ECB first mooted last month. Involving the purchase of government bonds in the open market, the scheme will provide a "fully effective backstop" against market volatility.
But he made it clear governments seeking help under the scheme would have to comply with strict rules and conditions first. It means Spain and Italy may have to follow the path of Greece, Portugal and Ireland in seeking formal bailouts before the ECB will act.
The ECB hopes buying sovereign bonds will help to raise their pricing and, as a result, lower their yield. Yields are used as a benchmark by countries to determine the cost they borrow in the market.
Yields for peripheral countries' five and 10-year bonds are still at elevated levels, despite falling in the past month since news of the bond-buying scheme emerged.
European markets edged higher after the announcement, with the Eurofirst 300 up 1.01 per cent at 1,090.17.
The ECB had earlier left its official interest rates unchanged.
Its growth forecast for this year was trimmed to about minus 0.4 per cent, with possible growth next year of up to 1.4 per cent.
Mr Draghi's announcement came on the same day a fresh wave of dire economic data signalled the euro zone was heading towards a deep recession.
The decision to go ahead with buying bonds signals Mr Draghi's victory in the battle to push through the scheme despite opposition from Germany's Bundesbank.
Mr Draghi yesterday said the vote in favour of the programme was not unanimous with one dissenting vote, without giving further details.
The latest measure will succeed the bank's securities markets programme, which has been inactive since March.
The EU's statistics office Eurostat confirmed GDP in the 17 countries using the euro fell 0.2 per cent in the second quarter compared with the previous quarter. The year-on-year fall was revised to 0.5 per cent from its previous estimate of 0.4 per cent.
Meanwhile, the Organisation for Economic Cooperation and Development, based in Paris, also warned the problems were infecting the global economy. The crisis was "dampening global confidence, weakening trade and employment and slowing economic growth," it said.
Other data showed unemployment in Greece, the initial source of euro-zone woes, rose to 24.4 per cent in June, up from 23.5 per cent in May.
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