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Draghi nudges Spain to take up bond plan

Associated Press Modified: October 4, 2012 at 11:01 am •  Published: October 4, 2012

The bank had already provided "a fully effective backstop" with the bond purchase offer, he added.

The ECB, Draghi said, had already "done what is necessary" by offering to buy countries' bonds on the secondary market, lowering their interest rates — if governments agree with the other 16 countries that use the euro on steps to improve their finances.

European stock markets were broadly unchanged on the announcement of the ECB's decision, with the Stoxx50 index of leading European shares down 0.14 percent at 2,541. The euro, meanwhile, was up against the dollar at $1.3007. The interest rate on Spain's 10-year bond was 5.89 percent on Thursday, up 0.11 percentage points on the day. This compares with more than 7 percent before the ECB plan was announced.

In addition to suspense over Spain, the eurozone is troubled by weak prospects for economic growth. The eurozone shrank 0.2 percent in the second quarter and is in danger of shrinking again in the third quarter. Draghi said he expects growth "to remain weak in the near term and recover only gradually thereafter."

Analysts were also pessimistic on the prospects for growth in the eurozone. "There remains significant downside risk to the euro area's economic outlook. Indeed, with no sign that the recession is over, further easing is likely in 2013," said Benjamin Reitzes, an analyst at BMO Capital Markets.

The bank held off from cutting its key interest rate again. In theory, that would boost the economy by making it easier for businesses to borrow and expand. But rates are already low and business borrowing remains weak because many managers see no prospect of expanding sales.

The ECB must also keep an eye on inflation, which remains stubbornly above its goal of just under 2 percent. The annual rate was 2.7 percent in September.

European governments have already had to bail out three countries — Greece, Ireland and Portugal — when they could no longer borrow at affordable costs and keep servicing their debts.

Cyprus has also asked for a bailout and Spain has received a commitment of up to €100 billion to repair its shaky banks which suffered heavy losses on real estate loans.