Hollande Says Europe Mulling Having ESM Buy Italian Bonds

French President Francois Hollande pushed German leaders to use the European Union’s permanent rescue fund to buy debt from countries such as Italy that have taken steps to revamp their economies.

“Italy has launched an idea that deserved to be looked at,” Hollande told reporters after a summit of Group of 20 leaders in Los Cabos, Mexico. The proposal is for “virtuous countries like Italy,” which have improved their public finances, to “be able to get funding for their debt” at better rates than countries that didn’t make the same efforts.

“We’re looking at the ways and means” to use the European Stability Mechanism, the 17-country euro region’s bailout fund, “at these conditions,” Hollande said. Germany said that no specific plans for Europe’s rescue funds to buy the bonds of euro-area governments were discussed.

G-20 leaders held their second consecutive summit dominated by the euro region crisis as officials told Europe to pull together to overcome its debt crisis. With Spain readying a request within days for as much as 100 billion euros ($127 billion) for its banks, the euro region pledged to take “all necessary policy measures” to defend the currency union.

Firepower

Hollande expects to discuss the bond-buying proposal with his German, Spanish and Italian counterparts when they meet in Rome in June 22. There is no decision made yet on the proposal, he said.

Among the range of crisis-fighting tools open to them, the existing rescue facility and the permanent fund, due to come in force in July, can buy sovereign bonds in the secondary market. European Commission spokesman Amadeu Altafaj said today there is no indication of any country calling on the rescue fund to come to their aid.

Bond purchases are like “financial paracetamol,” he said, treating the symptoms without addressing deep-seated economic problems.

The ESM will only have adequate firepower if it can borrow from the European Central Bank, said JPMorgan Chase & Co. economist Malcolm Barr.

“Unless such purchases are attached to granting the ESM a banking license, it is tough to see this idea being successful if pursued,” Barr said in an e-mailed comment. “It is rather disappointing that such a limited and unimaginative step should be on the table at this stage. The crisis demands a more profound response.”

No Question

Speaking in Mexico, Italian Prime Minister Mario Monti knocked down a report in the Daily Telegraph that said bond purchases would be a vehicle to rescue both Spain and Italy.

In the case of Italy, “there isn’t even a question around it,” he told reporters. In the case of Spain, the discussions are limited to a bailout of banks, he said.

This week’s Rome meeting is to help prepare for a June 28- 29 European Union summit in Brussels where leaders will discuss the path to tighter financial integration, including proposals for closer cooperation on banks.

“I have faith in this process because on growth, on a banking union and on linking solidarity and budget responsibility, we have possibility of an agreement” in Brussels, Hollande said.

To contact the reporter on this story: Sandrine Rastello in Los Cabos at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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French President Francois Hollande

Omar Torres/AFP/Getty Images

French President Francois Hollande said, “I have faith in this process because on growth, on a banking union and on linking solidarity and budget responsibility, we have possibility of an agreement” in Brussels.

French President Francois Hollande said, “I have faith in this process because on growth, on a banking union and on linking solidarity and budget responsibility, we have possibility of an agreement” in Brussels. Photographer: Omar Torres/AFP/Getty Images

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June 20 (Bloomberg) -- Andrew Bosomworth, a money manager at Pacific Investment Management Co., talks about the prospect of the European Central Bank resuming its bond-buying program. He speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)