ECB Signals Italian, Spanish Bond Purchases

The European Central Bank said it will “actively implement” its bond-purchase program, signaling 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. It also called on all euro-area governments to follow through on the measures agreed at a July 21 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 defense,” 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 & Poor’s decision on Friday to strip the U.S. of its AAA credit rating for the first time.

European stocks posted their biggest weekly loss since November 2008 last week. The Stoxx 600 Europe Index tumbled 9.9 percent to 238.88, the gauge’s lowest level in 13 months. Italian and Spanish bond yields rose relative to benchmark German bunds for a second week. Ten-year borrowing rates for both nations reached the most since before the euro was introduced in 1999.

To contact the reporter on this story: Jeffrey Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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