Hollande, Monti seek bonds action

Italy and France joined forces today to urge steps by European authorities to bring down the borrowing costs of countries that were being unjustifiably penalised by markets.

At a joint news conference after meeting in Rome, Italian prime minister Mario Monti and French president Francois Hollande said bond prices had become detached from economic fundamentals and EU institutions had to correct this.

"It is the role of those institutions involved in the euro zone to intervene, notably the European Central Bank," said Mr Hollande, speaking two days before the ECB governing council meets in Frankfurt.

After that meeting, ECB president Mario Draghi will try to back up his pledge to do "whatever it takes" to save the euro by presenting some details of a new bond-buying plan that markets hope can ease the euro zone crisis.

Spanish and Italian benchmark yields have eased in recent days on market expectations that the ECB will resume purchases of the countries' bonds.

Mr Monti said he expected EU measures to remove "the serious obstacle of (bond) spreads that have no underlying economic justification."

EU institutions have now recognised that for some countries "doing our homework is necessary but not sufficient," he said.

Mr Hollande said the level of debt yields that countries like Spain were having to cope were not justified by fundamentals.

He said a summit of EU leaders on October 18th and 19th could finalise solutions not just on debt-stricken Greece but also Spain, whose government has so far resisted seeking an EU bailout despite a deep recession.

Spanish prime minister Mariano Rajoy has said he is waiting to hear more about the terms of an ECB bond-buying programme - expected to be outlined by Mr Draghi on Thursday – before deciding if his country will apply.

Investors are watching after brinkmanship in the ECB's internal negotiations over the plan was played out in public last week, with one newspaper reporting that Bundesbank chief Jens Weidmann even considered quitting.

The ECB is being forced to take a greater role in fighting the debt crisis while governments negotiate legal and political hurdles to co-ordinating a longer-term response, but Germany's Bundesbank wants to limit the scope of ECB action.

"Draghi certainly has to present something," said Guillaume Menuet, economist at Citi. "A document of some sort, something of substance is what markets want to see in order to justify valuations."

Spanish and Italian government bond yields fell today as investors welcomed leaked comments Mr Draghi made behind closed doors in the European Parliament yesterday, suggesting the ECB could buy bonds with a maturity of up to three years - at the long end of market expectations.

Reuters