European Leaders Put Bond Buying on Table at Crisis Summit

EU President Herman Van Rompuy
Herman Van Rompuy, president of the European Council. Photographer: Chris Ratcliffe/Bloomberg

European Union leaders focused on immediate help for Spain and Italy at the start of a two-day summit intended to chart a path out of their financial crisis.

The 27 government chiefs will discuss buying Spanish and Italian government bonds to bring down borrowing costs that are near euro-era records, Finnish Prime Minister Jyrki Katainen said. He also proposed that bailout funds buy collateralized government debt in primary markets.

The Finnish proposal joined discussion of whether the euro area’s rescue fund should aid banks directly and the role of the European Central Bank, which has already bought more than 200 billion euros ($249 billion) of government bonds and pumped more than 1 trillion euros of three-year loans into the banking system. It shelved its bond-purchase program earlier this year amid growing resistance to the policy on the ECB Governing Council.

European Union Economic and Monetary Affairs Commissioner Olli Rehn said the ECB’s actions have prevented the crisis from worsening. He also called for “concrete measures” to help Italy and Spain and more debate about mutualized public debt.

“The ECB has played a key role in safeguarding financial stability,” Rehn said in an interview with Bloomberg Television. “We respect the independence of the ECB, but they have played a key role so far in fighting off the crisis.”

Leaders including German Chancellor Angela Merkel delayed a series of scheduled press briefings as talks continued on a proposed 120 billion-euro growth pact that includes a 10 billion-euro capital increase for the European Investment Bank. Euro-area finance deputies also began meeting this afternoon to discuss short-term steps to fight the crisis, according to an EU official.

Leaders are considering short-term measures to stem the sovereign debt turmoil as EU President Herman Van Rompuy’s road map to strengthen the bloc’s common currency and financial oversight ran into immediate opposition from Germany. Merkel has become increasingly isolated as French President Francois Hollande, Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy unite to push for quicker action to ease the crisis that emerged in Greece in late 2009.

“I’ve come for very rapid solutions to support countries in difficulty on the markets,” Hollande told reporters as he arrived in Brussels. Without specifying Spain or Italy, he said they “have made considerable efforts to deal with their public accounts.”

‘Kill the Economy’

Italy needs to be able to pool debt sales with the 16 other nations of the euro area to bring down borrowing costs as Monti, who has raised taxes and promised spending cuts, exhausts policy options, said Romano Prodi, a former head of government.

“I don’t think that anything more can be done, because otherwise you kill the economy,” Prodi, Italy’s prime minister from 2006 to 2008, said at a press conference in Brussels. “European solidarity, which must come to euro bonds, is the only possible solution.”

Italy today paid the most to sell 10-year debt since December, selling the notes to yield 6.19 percent. Spanish 10-year yields rose to 6.94 percent today. The focus should be on helping Spain’s banks and reducing Italian yields to around or slightly under 4 percent, Irish Finance Minister Michael Noonan said to reporters in Dublin today.

Joint Debt

Merkel, who has rejected calls to investigate joint debt or do more to cut Spanish and Italian borrowing costs, said her focus will be on measures to boost economic growth. As of June 25, draft conclusions for today’s meeting included a pledge to boost the bloc’s economy through improved economic governance, better use of the EU’s budget and a capital increase for the European Investment Bank.

“The debate today will center on a package for growth and employment,” she told reporters before the meeting. “I believe this package is ripe for approval today.”

Merkel met Hollande last night in Paris and will travel to Rome to meet Monti on July 4. Katainen proposed that financially struggling countries issue bonds backed by state assets or tax-revenue streams as a way out of the debt crisis.

Any decision to help Spain and Italy will hinge on the conditions, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. He said Italy already has a primary surplus and shouldn’t be asked to cut its budget further, while Spain is trying to rein in regional spending without taking on more arduous national commitments.

Bond Buying

“At the end of the day all this depends on the scale and objective of the bond buying,” Spiro said in an e-mail. “There may be ways to minimize the conditionality, particularly for Spain where this is a very sensitive issue.”

Europe’s bailout funds -- the temporary European Financial Stability Facility and its permanent successor, the European Stability Mechanism -- could buy the bonds in the primary market, Katainen said in an e-mailed statement from Finland’s representation to the European Union in Brussels.

“The EFSF or ESM could stand ready to intervene in the primary market to facilitate successful issuance of the covered bonds,” Katainen said. “Italy and Spain have lots of state properties they could use in raising money. Selling covered bonds would send a strong message they stand behind their debt.”

Katainen said the proposal is based on Finland’s experience with the sale of covered bonds during its economic troubles in the early 1990s.

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