FRANKFURT, Germany - The European Central Bank unveiled its most ambitious plan yet to ease Europe's financial crisis with a plan to buy unlimited amounts of government bonds to help lower borrowing costs for countries struggling to manage their debts.
Large-scale purchases of short-term government bonds would drive up their price and push down their interest rate, or yield, taking some pressure off of financially stressed governments such as Spain and Italy.
"We will have a fully effective backstop to avoid destructive scenarios," ECB President Mario Draghi said at a press conference, in which he also defended the euro currency union as "irreversible."
President of European Central Bank Mario Draghi listens to questions as the Euro logo is reflected in his glasses during a news conference in Frankfurt, Germany, Thursday, following a meeting of the ECB governing council concerning the further strategies in the European financial crisis.
After the ECB plan was announced, the yields on government bonds across Europe fell and stock markets rallied.
"This is a potential game-changer," says Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics. "This is the first time the ECB has committed its balance sheet in this way. And the way it is done is politically sustainable in Europe."
The ECB's 23-member governing council approved the plan with only one dissent. The head of Germany's Bundesbank, Jens Weidmann, opposes the plan, arguing that the ECB is moving too far in the direction of financing government deficits, which is prohibited by the European Union treaty.
The ECB's pledge of support came with an important caveat: Countries that want the central bank to help with their borrowing costs must first ask the 17 countries that use the euro to buy their bonds with existing bailout funds and they must submit their economic policies to the scrutiny of the International Monetary Fund.
That puts immense pressure on financially stressed countries such as Spain and Italy - which have been reluctant to seek help from their euro partners - to take the next step. Both countries face borrowing rates that are in the upper range of what's sustainable over the long-term.
Spanish Prime Minister Mariano Rajoy refused Thursday to make any commitment to trigger the ECB bond-buying. "When I have something new, I'll tell you," he told reporters at a press conference that was held after he met with German Chancellor Angela Merkel.
Italian Prime Minister Mario Monti praised the plan as an "important step forward" but said any decisions on Italy's potential request for aid were "premature."
If Spain and Italy were to accept aid from the eurozone's bailout funds, it would put them in the same company as Greece, Ireland and Portugal - something the two countries have been wary of.
An earlier ECB effort to drive down rates by buying bonds was limited in size - the ECB spent 210 billion ($264 billion) - and did not have lasting impact. The ECB ended that program Thursday.