September 3, 2012 / 6:55 PM / 7 years ago

UPDATE 1-ECB bond-buying would not breach rules-Draghi

* Draghi says bond-buying within ECB’s mandate

* Draghi says short-term bonds avoid monetary financing

By Francesco Guarascio

BRUSSELS, Sept 3 (Reuters) - Purchases of short term sovereign bonds by the European Central bank would not breach European Union rules, the ECB’s President Mario Draghi told European lawmakers on Monday, according to a recording obtained by Reuters.

Draghi, who is expected on Thursday to give some details of a new debt-buying scheme to help deeply indebted euro zone states, said he was not at risk of breaching the EU’s taboo of directly financing euro zone economies.

“If we are in the short term part of the market where bonds have a length of time maturity of up to one year, two years, or even three years, these bonds will easily expire,” Draghi told the Economic and Monetary Affairs Committee of the European Parliament.

“So there is very little monetary financing effect at all in what we are doing,” he said in the session behind closed doors.

Aimed at easing borrowing costs for vulnerable, indebted countries that ask for help, the bond-buying scheme has divided ECB policymakers.

But Draghi said the plan would support the bank’s central role of keeping prices stable in the 17-nation euro zone, as well as safeguarding the future of the euro.

“We cannot pursue price stability now when we have a fragmented euro zone,” Draghi said. “All these developments are a way to comply with our very mandate which is maintaining price stability.

“And all this has to do very much with the continuing existence of the euro in a moment when the rest of the world has now started to question the existence of the euro,” he said.

Under the plan, the ECB would buy bonds in combination with the European rescue funds to alleviate pressure on Italian and Spanish borrowing costs if the countries agreed to strict reform programmes beforehand.

Earlier on Monday, Italy’s two-year bond yield fell below 2.7 percent for the first time since April on the back of Draghi’s comments.

Draghi appeared to suggest Rome and Madrid needed help to maintain painful policies to cut their debt and deficits in the face of angry citizens who have seen their pensions reduced or have been laid off at a time of economic recession.

“Many of these countries have undertaken substantial progress in recent times, but we cannot exclude that at a certain time this policy will stop because of adjustment fatigue,” Draghi said.

“So that’s why we are asking for conditionality combined with this intervention of the ECB,” he told lawmakers.

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