Draghi says ECB plan allows for unlimited bond buys

The European Central Bank's new bond-buying program allows for unlimited interventions in sovereign debt markets and should dispel concerns about a euro zone break-up, ECB President Mario Draghi said on Wednesday.

Speaking a day before the ECB meets for its November policy meeting, Draghi also said that money was starting to flow back into the 17-country bloc, including its suffering southern members.

He added that the bank expects the euro zone economy to remain weak "in the near term" but that "inflation is well contained. We expect it to fall below 2 percent next year."

The European Commission said on Wednesday that the euro zone economy will barely grow next year but pick up in 2014, forecasting slower growth than governments in all the bloc's biggest economies expect.

The ECB is set to leave interest rates unchanged on Thursday, deferring a cut in borrowing costs that would risk undermining the impact of Draghi's signature bond-purchase plan a year into his ECB presidency.

The bond-buying program offered a credible backstop against disaster scenarios, Draghi said.

"Our new program of Outright Monetary Transactions provides this backstop by allowing for unlimited interventions in government bond markets," he told a banking conference.

"But we have to understand how markets work. Our actions have to send a clear signal to markets that their fears about the euro area are baseless," he added.

Investors and euro zone policymakers have been urging Spain to seek aid from Europe's bailout funds to allow the ECB to begin buying its bonds under the OMT.

Austria's representative at the ECB, Ewald Nowotny, said on Tuesday it made sense to deploy the program to dispel market doubts.

Spanish Prime Minister Mariano Rajoy has so far avoided seeking help, saying he wants assurances ECB intervention would bring down Spain's debt costs.

Draghi said the euro zone is stabilizing and investors are beginning to reinvest in the currency bloc.

"Two, three days ago, we saw that money from the rest of the world came back to Europe, investors have started to reinvest in the euro area," he told the conference.

But he stressed that euro zone governments must press ahead with efforts to forge closer financial, fiscal, economic and political union.

"Actions by the ECB can build confidence in the euro area in the near term. But only actions by governments can secure confidence in the euro area over the longer term," he said.

Turning to a European Commission proposal for a new European banking supervisor based at the ECB, Draghi said this was important to ensure consistency across the euro area, but sought to assuage German fears that they would have to pay depositors when any euro zone bank fails.

"Financial union does not have to imply the pooling of deposit guarantee schemes, an issue that I know is of concern in this country," he said. "Organizing and funding deposit guarantee schemes can remain a national responsibility, with comparable effectiveness."

(Reporting by Eva Kuehnen and Paul Carrel. Editing by Jeremy Gaunt.)