Draghi pledges to do ‘whatever it takes’ to save euro

Financial markets rose Thursday after European Central Bank head Mario Draghi raised expectations it might step in and buy the bonds of debt-burdened eurozone members.

Draghi said in London that the ECB would "do whatever it takes to preserve the euro" and added, "believe me, it will be enough."

He discussed the high borrowing costs being imposed on some countries' bonds, saying that "they come within our mandate" — but only if those costs are stopping the ECB's interest rate policies from being implemented throughout the 17-country eurozone.

In Toronto, the S&P/TSX composite index gained 147.24 points to close at at 11,639.75. The Canadian dollar jumped 0.55 of a cent to 99.05 cents US.

U.S. markets also rose, with the Dow Jones industrials up 211.88 points at 12,887.93. The Nasdaq climbed 39.01 points to 2,893.25. and the S&P 500 index gained 22.13 points to 1,360.02.

Marshall Auerback, a director of Pinetree Capital, told CBC News he thinks Draghi’s comments suggest key members of the German government, the paymaster of the eurozone, realize the ECB must act.

"I’m sure this had some tacit German approval and I think they are aware of the fact that they are at a crisis point and they really need to do something, and that something has to involve the European Central Bank. There’s no other way of getting around the problem."

Auerback says the German government has come to realize "the cost of the breakup would be extraordinarily damaging to Germany in particular."

'They are aware of the fact that they are at a crisis point.'—Marshall Auerback, Pinetree Capital

But there was also skepticism.

"It remains to be seen," said Garey Aitken, director of equity research at Bissett Investment Management in Calgary.

"Maybe it does translate into something that is quite significant and positive but really pretty much all comments, intentions, summits, (in the past) the end result has been much more disappointing than the original hope."

Oil prices rose after Draghi's comments. Crude for September delivery closed up 42 cents at $89.39 US a barrel on the New York Mercantile Exchange.

Oil prices had been falling earlier in the session on a surprising rise in U.S. crude inventories and a slowdown in South Korea's economy. U.S. crude supplies have grown this year to the highest levels since 1990.

The Energy Information Administration said that gasoline supplies increased by 4.1 million barrels last week. Analysts were expecting supplies to grow by only 750,000 barrels.

South Korea's second quarter growth figures provided more evidence of the toll that Europe's prolonged debt crisis is taking on Asia.

The region's fourth-largest economy said economic growth slowed to a two-year low as weakness in Europe crimped demand from South Korea's biggest market China.

Market sentiment had also been given a boost already on Wednesday, when ECB policymaker Ewald Nowotny suggested that Europe's bailout fund could be given a banking licence. That would give it the ability to borrow money from the ECB.

Bailout fund unable to rescue both Spain and Italy

Such a move would be of particular significance for Spain and Italy as the current bailout fund does not have enough money to rescue them both.

The ECB has already used similar reasoning to make limited purchases of government bonds in the past with the aim of driving down a government's borrowing costs.

European markets closed higher, London's FTSE 100 index ahead 1.36 per cent, Frankfurt's DAX rose 2.75 per cent while the Paris CAC 40 jumped 4.07 per cent.

Draghi’s comments came shortly after traders pushed Italy’s borrowing costs up to their highest level since November in a sale of two-year bonds. It paid 4.86 per cent to sell €2.5 billion ($3.1 billion Cdn) in two-year debt, up from 4.71 per cent a month ago.

It was the highest rate paid on two-year bonds since Premier Mario Monti's government of technocrats took power with the remit of protecting Italy's economy from the European debt crisis.

Despite austerity and economic reform measures, investors are worried that Italy will not be able to control its public debt, which has reached 123 per cent of GDP — the second-highest among the 17 countries that use the euro.

Spain's bond yields have also hit record highs recently.

The yield on Spain's 10-year government bonds fell sharply following Draghi's comments, moving down 40 basis points to 6.94 per cent. Anything over seven per cent is considered unsustainable in the long run.