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If Italy wants ECB help, it needs a bailout first: Draghi

FRANKFURT (Reuters) - Italy would need to secure a bailout from the European Union if it is to receive any help from the European Central Bank to bring down its borrowing costs on financial markets, the ECB’s President Mario Draghi said on Thursday.

European Central Bank (ECB) President Mario Draghi speaks during a news conference following the governing council's interest rate decision at ECB headquarters in Frankfurt, Germany, October 25, 2018. REUTERS/Kai Pfaffenbach

The European Commission rejected Italy’s draft 2019 budget this week, saying it brazenly broke EU rules on public spending, and asked Rome to submit a new one within three weeks or face disciplinary action in a standoff that has sent investors fleeing Italian bonds.

Confirming what sources told Reuters earlier this month, Draghi said the ECB would only come to Italy’s rescue if the country subscribed to an adjustment program with the European Stability Mechanism (ESM) -- political parlance for a bailout with strict policy prescriptions.

This would clear the way for the ECB to buy Italian bonds on the market via so called Outright Monetary Transactions (OMT) -- a tool announced at the height of the debt crisis in 2012 and as yet unused.

“What is available for the ECB towards a specific country is OMT,” Draghi told a press conference after a meeting of the ECB’s policy-making Governing Council.

“And the OMT is subject to having a program with ESM and is also subject to the assessment by the Governing Council that the undertaking of the OMT doesn’t prejudge the monetary policy for the whole of the euro area,” he added.

Draghi also warned that the sell-off in Italian government bonds was set to dent the capital of Italy’s banks, which own about 375 billion euros ($426.30 billion) worth of that paper.

Italy’s European Affairs Minister Paolo Savona responded to Draghi later on Thursday, saying it was up to the ECB “to intervene should there be a crisis in the banking sector”.

Italy’s bond yields hit a 4-1/2 year high last week as investors worried that the row between Rome and the Commission might eventually push the euro zone’s third-largest economy outside the currency bloc.

Savona had said earlier this month he was confident that, if necessary, Draghi would “take care of things” and “prevent another grave crisis in Europe”.

But Draghi stressed it wasn’t the ECB’s job to bankroll governments.

“Our mandate ... is a mandate towards price stability, not towards financing governments’ deficits or adhering to a fiscal dominance situation,” he told the news conference.

The ECB’s goal is keeping inflation in the euro zone close to, but below two percent a year.

With Draghi seeing “limited” spillover to other countries’ bonds from the Italian rout, the ECB confirmed on Thursday its plan to end its 2.6 trillion euro bond-buying program at the end of this year and raise interest rates for the first time since 2011 sometime after next summer.

But the central banker also sought to strike a constructive tone on the Italian situation, saying he was “confident” that Rome would eventually reach an agreement with the Commission.

He also quoted European Commission Vice President Valdis Dombrovskis, who was also at the ECB meeting, as saying: “We have to observe and apply fiscal rules. But we are also seeking a dialogue.”

Editing by Hugh Lawson, Catherine Evans and William Maclean