Draghi faces baptism of fire on first day at ECB helm

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Italy's Mario Draghi faced a baptism of fire on the first day in his new role as European Central Bank president Tuesday as shock waves from the Greek crisis threatened to spread to Italy as well.

The 17-nation eurozone found itself back in deep crisis as markets panicked over a shock call by Greece for a national referendum on a debt rescue reached with huge difficulty only last week.

The announcement rocked global stocks, angered leaders across Europe and reignited concerns about the future of the single currency -- all just as G20 leaders prepare for a summit in France this week.

Italy, in particular, saw its borrowing rates soar as a possible 'No' vote in the referendum would make it even more difficult for Premier Silvio Berlusconi to stave off contagion from the debt crisis.

According to market sources, the ECB sought to ease some of the tensions by buying up Italian bonds.

The intervention -- which the ECB never confirms -- initially helped somewhat, easing the yield on 10-year Italian government bonds.

But the effect was short-lived and the rate shot up to 6.33 percent later, perilously close to its record high of 6.397 percent seen in August when the government was forced to adopt emergency austerity measures and the ECB first started propping up Italian bonds.

The ECB was tight-lipped, simply issuing a terse three-sentence statement on the changeover at the helm.

"Mario Draghi, former Governor of the Banca d'Italia, has taken up his duties as president of the European Central Bank," the statement said.

"He was appointed on June 23 by the European Council for a term of office of eight years. He succeeds Jean-Claude Trichet, who was president of the ECB from November 1, 2003 to October 31, 2011."

Amid the havoc, many people believe the ECB is the only institution in the single currency area to have the firepower to calm the debt tensions.

Thus, all eyes will be on Draghi, a 64-year-old former Goldman Sachs banker, when he gives his first news conference as the new ECB chief on Thursday after a policy meeting.

ECB watchers do not expect him to announce any cuts in eurozone interest rates after only two days in office.

But markets will be waiting to hear whether the ECB will continue or even increase its controversial programme of buying up bonds issued by debt-wracked eurozone states.

Analysts believe the ECB's hands are tied.

UniCredit chief eurozone economist Marco Valli said the ECB had done what it could.

"But obviously given the different opinions within the governing council, it is clear it cannot commit a huge amount of resources and from time to time this is not enough to prevent significant spreads, as observed in the last couple of days."

Beyond this, however, it was not the ECB's role to play firefighter all the time, the expert argued.

"We should not make the mistake to confuse what is in the ECB hands and what is in the governments' hands. The ECB certainly can help," but such help had to be of a temporary and limited nature, Valli said.

As ECB president, Draghi should be able to exert greater pressure on the Italian government to get its finances in order than when he was head of the Bank of Italy, the economist said.

Natixis economist Sylvain Broyer said it was "very difficult" on such a day for any one institution to calm the markets but saw no immediate danger for Italy in the sudden surge in bond yields.

"All in all, Italy could finance itself at 6.0 percent for six to nine months without any solvency problems," the analyst said.

© 2011 AFP

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