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Central Bank To Buy Bonds To Bolster Struggling EU Economies

European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt on September 6.
The European Central Bank (ECB) has announced a program in which it could buy bonds of struggling eurozone countries like Spain and Italy in a bid to lower their borrowing costs and soothe fears of a euro collapse.

The program to purchase sovereign bonds in the secondary market is called "outright monetary transactions."

ECB President Mario Draghi said it was meant to "help reduce the severe distortion in government bond markets."

"We need to be in the position to safeguard the monetary-policy transmission mechanism in all countries of the euro area," Draghi added.

"We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the euro area."

He said it would have no set limit and, "under appropriate conditions," would be a "fully effective backstop to avoid destructive scenarios."

Draghi said countries that wanted the ECB to buy their bonds must first seek help from European bailout funds and agree to "strict and effective" budget policies to reduce debt.

He said the International Monetary Fund (IMF) would help monitor compliance by governments to ensure they met those budget conditions.

"The risks surrounding the economic outlook for the euro area are assessed to be on the down side. They relate, in particular, to the tensions in several euro-area financial markets and their potential spillover to the euro-area real economy," Draghi said.

"These risks should be contained by effective action by all euro-area policymakers."

Are Spain, Italy Next In Line?

At current market rates, countries like Spain and Italy are finding it increasingly difficult to borrow on financial markets. That has raised concerns about the need for bailouts from their European Union partners.

The ECB's bond-buying program has strong opponents -- particularly politicians in Germany and the president of the Bundesbank, the country's central bank -- who have argued that such measures amount to direct financial help, with the central bank printing money to pay off a country's debt.

Critics have also argued that without strong market pressure, countries will not muster the discipline to stick to their commitments to cut spending and reduce their deficits.

Three eurozone countries -- Ireland, Portugal, and Greece -- already have received financial aid packages worth hundreds of billions of euros from the EU and the IMF.

Greece is currently trying to renegotiate the terms of its second bailout. Without access to that aid, it is expected that Greece would likely have to quit the euro, potentially triggering fresh global financial turmoil and further dragging down the 17 eurozone economies.

There are concerns that any future assistance required by Spain and Italy could be more than their eurozone partners can provide.

Spain has already been promised up to 100 billion euros ($126 billion) for its struggling banks.

If Madrid seeks a bigger general bailout, the government would have to agree to even more severe austerity measures -- and Spain already is reeling from unemployment of nearly 25 percent and a prolonged recession.

German Chancellor Angela Merkel said on September 6 after talks in Madrid with Spain's Prime Minister Mariano Rajoy that she had "great respect" for the economic reforms undertaken there. But she warned that it would take time to see the results.

With reporting by Reuters, AP, AFP, and dpa
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