Risk premium falls and Ibex rises as Draghi heeds Spain’s plea

Spain’s increasingly desperate calls for the European Central Bank to implicate itself more in easing pressure on its sovereign debt has finally found attentive ears. ECB President Mario Draghi on Thursday resorted to central banks’ preferred form of intervention: making a threat.

“To the extent that the size of these sovereign premia [borrowing costs] hamper the functioning of the monetary policy transmission channel, they come within our mandate,” Draghi said during a speech in London. “We have to cope with the financial fragmentation, and address these issues.

“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” he continued. “And believe me, it will be enough.”

The ECB chief said there were no “taboos” in policy action, adding that the absence of inflationary pressure in the euro zone amplified the battery of measures at the bank’s disposition.

Draghi’s words alone were sufficient to send speculators scurrying to cover their positions, pushing Spain’s risk premium back below 600 basis points for the first time since July 20, while stocks posted their biggest rise in two years.

After hitting levels as high as 7.47 percent, the yield on the Spanish benchmark government bond had eased to 6.926 percent by the close. Yields on shorter maturities also fell sharply. As a result, the spread with the German bund had narrowed 50 basis points from Wednesday’s close to 561 basis points. Italy’s risk premium also fell sharply to below 500 basis points.

According to European Union and financial sector sources, the ECB is studying a series of measures to help ease the pressure on financially distressed euro zone countries such as Spain and Italy.

Draghi’s remarks came a day after ECB Governing Council member Ewald Nowotny suggested the European Stability Mechanism (ESM), Europe’s permanent rescue fund, should be granted a banking license.

This would allow it to borrow from the ECB, swelling the funds at its disposition to help out ailing euro-zone countries.

Spain has been trying to drum up support from its European partners for greater involvement from the ECB in finding a solution to the euro crisis. Spanish Economy Minister Luis de Guindos met with German Finance Minister Wolfgang Schäuble on Tuesday and followed that up by calling on his French counterpart Pierre Moscovici on Wednesday.

Spain wants speedy implementation of decisions taken at a European Council summit at the end of June to move toward a European banking union and greater financial and economic integration in the euro zone.

Draghi’s remarks also delighted the stock market despite early sharp losses by Telefónica, which at one point had shed 8 percent after announcing after the market closed on Wednesday that it would omit dividend payments on 2012 earnings in order to shore up its balance sheet by accelerating its debt-reduction program.

Telefónica also announced that its net income in the first half of the year was down 34 percent from a year earlier at 2.075 billion. Telefóncia, however, eventually rallied to close up 3.35 percent.

The blue-chip Ibex 35 index closed up 6.06 percent at 6,368.80 points. Among the banks Santander added 10.67 percent despite reporting a fall in its net income in the first half of 51 percent to 1.704 billion euros. Its main rival BBVA also gained 10.67 percent.

Repsol put on 7.90 percent also after announcing a 14.6-percent fall in net profit to 903 billion euros due to the impact of a drop in oil prices on its inventories. Excluding the impact of inventories net adjusted profit was up 26.6 percent at 481 million euros.