THE EUROPEAN Central Bank last night indicated it would buy Italian and Spanish sovereign bonds to stabilise the euro zone as France and Germany promised to deliver robust reforms by the end of next month.
After a day of frantic phone calls triggered by the US credit rating downgrade, Berlin and France issued a joint communique last night hoping it would head off financial market chaos this morning.
In the statement the French and German leaders expressed confidence that reforms agreed last month would convince the ECB to act to stabilise the euro zone until the EFSF stability fund can do so later this year.
The ECB’s 23-member governing council agreed the move last night in a telephone conference chaired by bank president Jean-Claude Trichet.
“The ECB will actively implement its Securities Markets Programme,” said the bank in a statement, noting renewed promises for fiscal and regulatory reform from euro zone members.
“This programme has been designed to help restore a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.”
Earlier Chancellor Angela Merkel and French President Nicolas Sarkozy stressed in their statement “the importance that parliamentary approval” for new EFSF powers “will be obtained swiftly by the end of September in their two countries”.
German officials insisted yesterday that, until parliamentary approval in euro zone member states, it was the ECB’s obligation to buy Italian and Spanish sovereign bonds.
“Mr Trichet wants political confirmation that everything his bank buys now will be handed over the EFSF later,” said a senior Berlin source.
Dr Merkel and Mr Sarkozy welcomed promises by Italy and Spain to boost competitiveness and increase the pace of budgetary consolidation measures.
“The Italian authorities’ goal to achieve a balanced budget a year earlier than previously envisaged is of fundamental importance,” the communique continued, adding that the two leaders “stress that complete and speedy implementation of the announced measures is key to restore market confidence”.
France and Germany expressed confidence “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 two leaders have agreed to remain on holidays and discuss future steps after watching financial market reaction today and tomorrow.
An ECB source said that eurozone central bankers would discuss emergency liquidity measures should markets come under pressure in trading today. A similar measure was reportedly under discussion by G7 finance ministers in a conference call yesterday.
“Italian and Spanish bonds are no longer top of the agenda,” the ECB source said.
Last night’s ECB discussion follows last week’s reactivation of the bond-buying programme to buy Irish and Portuguese debt.
Council members from Germany, the Netherlands and Luxembourg are strictly opposed to the practice. The purchase could drive down spiraling bond interest rate yields, preventing Italy and Spain seeking bailouts their neighbours cannot afford through the existing €440 billion EFSF rescue fund.
But the sheer size of the two countries’ economies lifts the risks attached to bond-buying into another league.
ECB STATEMENT
The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.
2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.
3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.
4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.
5. It equally considers fundamental that governments stand ready to activate the European Financial Stability Facility (EFSF) in the secondary market, on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability, once the EFSF is operational.
6. It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme 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.