ECB ready to start buying Italian and Spanish bonds
The European Central Bank said tonight it will "actively implement" its bond-purchase program, signalling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.
In a statement issued in the name of president Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the Frankfurt-based ECB welcomed Italy and Spain's efforts to reduce their budget deficits.
The agreement of the bank's policy-making Governing Council to buy the government bonds of the euro zone's third and fourth biggest marked a watershed in the ECB's fire-fighting after modest bond buying efforts last week failed to stem contagion to the currency bloc's larger economies
The ECB also called on all euro-area governments to follow through on the measures agreed at a July 21st summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.
"It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program," the central bank said.
"This program has been designed to help restoring a better transmission of our monetary policy decisions - taking account of dysfunctional market segments - and therefore to ensure price stability in the euro area."
With governments failing to act swiftly enough to stop contagion, it has fallen to the ECB to battle a crisis that's threatening the survival of the euro.
Buying Italian and Spanish debt may open the ECB to accusations it is bailing out profligate nations, breaching a key principle in the euro zone's founding treaty and eroding its credibility. Germany's Bundesbank opposes the move.
"The ECB is once again intervening as the last line of defence," said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London.
"The intervention will put a halt to the bond market crash that some member states faced. However, the ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe."
ECB policy makers were forced to step up their response to the crisis after their failure to enter the Italian and Spanish bond markets last week helped fuel a global rout. Fears of a further slump when markets open tomorrow have been compounded by Standard and Poor's decision on Friday to strip the US of its AAA credit rating for the first time.
Officials on an ECB conference call carefully considered the situation in Italy and Spain, and took note of a statement by France and Germany earlier this evening stressing their commitment to European financial reforms.
German chancellor Angela Merkel and French president Nicolas Sarkozy said they were committed to getting approval from their parliaments for new powers for the European Financial Stability Facility rescue fund by the end of September.
That will allow the EFSF to buy government bonds in the secondary market if the ECB thinks it is warranted and if euro zone member states agree, potentially absolving the ECB of the need to do so, a policy that a powerful minority of its council members strongly oppose.
"France and Germany are confident that the ECB analysis will provide the appropriate basis for secondary market interventions as it will help determine the case when financial stability of the euro zone as a whole is at risk," the leaders said.
Their statement reiterated the agreement at last month's emergency euro zone summit which granted a second bailout to Greece, but the focus on the EFSF's ability to buy government bonds once the bloc's parliaments have ratified its new powers was meant to encourage the ECB to do the same in the interim.
Twin debt crises in Europe and the United States are causing global market turmoil and stoking fears of the rich world sliding back into recession.
Another source said the ECB meeting was put back into the evening to see what measures US authorities were prepared to take to calm markets after credit ratings agency Standard & Poor's downgraded Washington's AAA rating to AA+ on Friday.