The European Central Bank has backed up a pledge six weeks ago by its president, Mario Draghi, to do whatever it takes to save the euro.

The bank yesterday announced an open-ended programme to buy the bonds of struggling euro-area Governments to bring yields down.

The aim is to break a vicious circle or feedback loop, where fears about a country exiting the euro area push up yields on its Government's debt to insupportable levels, which in turn reinforces break-up fears.

Draghi said the plan would "enable us to address severe disruptions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro".


There are strings attached.

Governments will first have to request, and their peers agree to, assistance under existing euro-area bailout funds, which are conditional on strict fiscal and structural reforms.

Some analysts have questioned, however, whether the ECB could, if it came to it, pull the plug on a country which missed its targets, if that would push it into bankruptcy and the eurozone into chaos.

- REUTERS quotes Gary Jenkins of Swordfish Research, who likened it to the ECB "putting a gun to its own head and threatening to pull the trigger".

The ECB has set no limit on the amount of bonds it is prepared to buy, though they will be confined to maturities of one to three years.

The purchases will be sterilised - that is, the central bank will withdraw an equivalent amount of liquidity elsewhere in the system - in deference to German concerns that otherwise it would simply be printing money to cover the budget deficits of feckless Governments, with potential inflationary consequences.

The ECB has intervened in bond markets twice before, buying up Greek debt in May 2010 and trying last year, with only transitory success, to reduce Italian and Spanish bond yields.

This time "it will actually work", Draghi said.


The move comes when a feeble European economy is sapping confidence and growth in the global economy. The ECB expects activity in the euro area to shrink 0.4 per cent, and the mid-point for its estimates of growth next year is just 0.5 per cent.

The Organisation for Economic Co-operation and Development in updated near-term forecasts issued yesterday said the euro crisis was still the most important risk for the world economy.

In the peripheral eurozone economies "most banks are excluded from the funding markets, deposits are falling and lending rates have soared".

But there are other risks as well: disruptions to oil supplies that could send already high crude prices higher still, and a failure in Washington to avoid the "fiscal cliff" and derail an already weak United States recovery.

Unless a new agreement can be reached after the November elections, existing legislation implies a sharp fiscal contraction next year.

Global GDP growth rates rebounded by the end of 2009 to where they were before the global financial crisis, but have halved since then, driven by the OECD economies.

World trade has slowed, with China's exports to Europe especially hard hit.

The OECD notes a weakening in both consumer and business confidence in most major economies.

The weakening in business confidence has been particularly evident in manufacturing sectors, it says, consistent with waning indicators of global trade such as export orders.