Spain, Italy back in bond market firing lineAugust 3, 2012: 7:34 AM ET
One week after he said the ECB would do "whatever it takes" to support the euro currency, ECB president Mario Draghi said Thursday that governments, including those in Spain and Italy, must first ask the eurozone bailout funds to buy bonds before the ECB will intervene.
The yield on Spain's 10-year bonds jumped as high as 7.43%, before easing back toward 7%. Italian 10-year yields were as high as 6.45%.
Under the vague "guidance" that Draghi offered, Spain and Italy would sign a formal agreement with the European Financial Stability Facility, or the European Stability Mechanism, outlining the terms of an official assistance program.
Draghi said bailout funds should be used to buy bonds "when exceptional financial market circumstances and risks to financial stability exist." But he stressed that any government that benefit from such intervention will be subject to "strict and effective conditionality in line with the established guidelines."
No country has ever asked the EFSF to buy its bonds, and the ESM is not expected to be fully functioning until mid-September at the earliest.
However, in demanding that the EFSF and ESM take part in any bond buying, the ECB made clear that it will not intervene without assurances that governments will abide by their commitments to cut deficits and boost economic growth.
"If there was one clear message from Thursday's ECB press conference, it was that there will be no unilateral bond buying by the ECB," James Nixon, an economist at Societe Generale, wrote in a report.
The ECB's announcement caught many investors off guard. Draghi had raised hopes for an immediate intervention last week when he first argued that buying bonds fell within the ECB's mandate.
Draghi reiterated Thursday that the "euro is irreversible." Assuming Spain and Italy agree to ask the EFSF for help, he said the ECB "may undertake outright open market operations of a size adequate to reach its objective."
The ECB would focus any such purchases on short-term notes, according to Draghi.
The yield on Spain's 2-year notes fell to a low of 4%, down from a record high above 6% late last month. Italy's 2-year yields were down to 3%.
The big question is will Spain and Italy be willing to agree to the terms of an official aid program with the bailout funds.
Officials in Madrid and Rome have so far been reluctant to access the EFSF, which has backed bailouts, along with the International Monetary Fund, for Greece, Portugal and Ireland.
"The markets got the worst of both worlds," said Nicholas Spiro, director of London-based consultancy Spiro Sovereign Strategy. "No swift action and a clear indication that any bond buying on the part of the ECB will be heavily circumscribed."