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All eyes on ECB to unveil new anti-crisis measures

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(FRANKFURT) - All eyes were on the European Central Bank Thursday to resolve the eurozone's debt crisis, which is threatening to pull down the world economy, as German Chancellor Angela Merkel was in Spain for talks.

The ECB, at its regular monthly policy meeting, held its key interest rate unchanged at the historic low of 0.75 percent, as most expected.

But markets were on tenterhooks as to whether Draghi would unveil a new set of crisis measures at the regular post-meeting news conference.

"The ECB might have decided to keep rates stable as the governing council might prefer to concentrate on 'non-standard' measures first and wait to see if a bold action has an effective impact on the real economy," said Newedge Strategy analyst Annalisa Piazza.

"Although the ECB kept rates unchanged today, we expect Draghi to leave the door open to more standard measures in the near future," she added.

The Paris-based Organization for Economic Cooperation and Development warned that the eurozone crisis was "the greatest risk to the global economy."

It said fears about a possible exit by Greece from the euro area "are pushing up (government bond) yields, which in turn reinforces break-up fears.

"It is crucial to stem these exit fears," the OECD argued.

"This could be achieved by the ECB undertaking bond market intervention to keep spreads within ranges justified by fundamentals."

Spanish Prime Minister Mariano Rajoy, too, is hoping the central bank will embark on unlimited bond purchases, a move that would help bring down his country's cripplingly high borrowing costs, which he argues are unjustified.

"The risk premia are not the result of Spain's economic fundamentals, but due to doubts about the euro," Rajoy told the German daily Frankfurter Allgemeine Zeitung ahead of his Madrid meeting with Merkel.

The risk premium, or spread, is the difference between what Spain has to pay for loans on the open market and what Germany, the eurozone's most stable economy, has to pay.

And although that spread has widened to a whopping 5.5 percentage points recently, Spain borrowing rates tumbled in a 3.5-billion-euro ($4.4-billion) bond auction ahead of the ECB meeting.

Spain's reform efforts should be taken into account and the country must be given a chance to press ahead, Rajoy argued.

"The risk premia and interest-rate differentials are negating all our efforts," Rajoy insisted.

ECB watchers warn however that markets could be disappointed if they expect Draghi to announce an immediate roll-out of new bond purchases after the SMP has lain dormant for most of this year.

SMP was launched in May 2010, and has helped debt-wracked eurozone countries that find it difficult to drum up financing in capital markets.

The ECB has since accumulated 208.5 billion euros in bonds from Greece, Ireland, Portugal, Italy and Spain as part of the programme.

But it has faced fierce opposition, not least in Germany, where critics argue the scheme is tantamount to monetary financing, where the central bank prints money to pay off a country's debt.

That is expressly forbidden under the ECB's statutes.

"It's important to have principles in life. But sometimes it's good to be flexible," Rajoy countered.

"Orthodox thinking is very good. But it's not all black and white. Sometimes it's the grey tones that help solve a problem."

Media reports suggest that the ECB's revamped bond-buying programme -- reportedly termed Monetary Outright Transactions or MOOT -- will not entail setting public yield caps as some players had speculated.

Yield caps are pre-set ceilings above which the ECB would automatically start buying bonds.

The scheme would also be subject to strict conditions.

Countries wishing to benefit would have to request a bailout from one of the eurozone's rescue funds, the EFSF or the ESM, to ensure they continue their reforms.

And Draghi has signalled that the ECB would limit the eligible maturities to a maximum of three years.

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