BERLIN—Barely 12 hours after a reluctant European Central Bank breathed new life into the euro project, German politics dashed hopes that Europe would soon receive a bigger bulwark against a spreading government-debt crisis. A spokesman for German Chancellor Angela Merkel, Christoph Steegmans, removed hopes of a more robust European Financial Stability Facility, saying the fund will stay as agreed at a July 21 European Union summit. "The EFSF will remain what it is, and keep the volume it had before July 21," Mr. Steegmans said at a regular government press conference. The ECB Sunday made a landmark decision to expand its bond-buying program to include Italian and Spanish government debt, a step aimed at stopping a market sell-off that threatened to send their borrowing costs to unsustainable peaks. The ECB hesitated last week to take such a step, which greatly expands its role as an underwriter of government finances. But it was deemed critical to buy time until an improved bailout fund, the EFSF, could be ratified and implemented before October. The changes to the EFSF mandate would allow the fund to buy government bonds in the secondary market. The European Commission has asked for a massive increase in the EFSF's current lending capacity of €440 billion ($628.23 billion) guaranteed by euro-zone governments. Market watchers said a new volume of up to €1.5 trillion or more might be needed to reassure investors that the fund can offset government solvency threats. The euro promptly lost much of the ground gained from the overnight ECB announcement as investors responded to German opposition to a massive build-up in the euro-zone's defenses against debt contagion.
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Monday, August 8, 2011
BERLIN—Barely 12 hours after a reluctant European Central Bank breathed new life into the euro project, German politics dashed hopes that Europe would soon receive a bigger bulwark against a spreading government-debt crisis. A spokesman for German Chancellor Angela Merkel, Christoph Steegmans, removed hopes of a more robust European Financial Stability Facility, saying the fund will stay as agreed at a July 21 European Union summit. "The EFSF will remain what it is, and keep the volume it had before July 21," Mr. Steegmans said at a regular government press conference. The ECB Sunday made a landmark decision to expand its bond-buying program to include Italian and Spanish government debt, a step aimed at stopping a market sell-off that threatened to send their borrowing costs to unsustainable peaks. The ECB hesitated last week to take such a step, which greatly expands its role as an underwriter of government finances. But it was deemed critical to buy time until an improved bailout fund, the EFSF, could be ratified and implemented before October. The changes to the EFSF mandate would allow the fund to buy government bonds in the secondary market. The European Commission has asked for a massive increase in the EFSF's current lending capacity of €440 billion ($628.23 billion) guaranteed by euro-zone governments. Market watchers said a new volume of up to €1.5 trillion or more might be needed to reassure investors that the fund can offset government solvency threats. The euro promptly lost much of the ground gained from the overnight ECB announcement as investors responded to German opposition to a massive build-up in the euro-zone's defenses against debt contagion.
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LONDON—The European Central Bank drove yields on Italian and Spanish debt sharply lower Monday when it bought sovereign bonds issued by both countries for the first time.
Two-year and five-year Spanish and Italian bond yields were over 0.9 percentage point tighter versus similar-dated German bonds. 10-year bond yields dropped well below the 6% level that they had breached last month and which some analysts see as unsustainable.
European stock markets start the week with a dive into the red as a reaction to the U.S. AAA rating downgrade over the weekend. WSJ's Charles Forelle joins the News Hub from Brussels to explain. (Photo: Getty Images)
.Two traders estimated that the ECB had bought around €4.5 billion ($6.43 billion)-€5 billion of the two countries' bonds by mid-afternoon in Europe, with the purchases focused on Italy.
The ECB said late Sunday it would "actively implement" its bond-buying program, which it resumed last week with purchases of Irish and Portuguese bonds. Italian and Spanish bonds had already rallied hard early Monday in anticipation of the ECB entering the market.
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.."In terms of positioning, the market had been short in Italy and Spain, which is why we're seeing such wild moves," one trader said.
Finance ministers and central bankers around the world conducted emergency telephone conferences over the weekend after Standard and Poor's stripped the U.S. of its triple-A rating and after Italy and Spain shifted into the eye of the euro-zone debt crisis storm over the last week, when their borrowing costs hit record highs compared to Germany's.
French Finance Minister François Baroin said Italy and Spain's plans to speed up fiscal and structural reforms have allowed the ECB to legitimately step in to help them.
"These announcements from Spain and Italy allowed the ECB to consider it legitimate to help them. The ECB has announced, without ambiguity, its intervention to buy Italian and Spanish debt," Mr. Baroin said on French radio station Europe 1.
Mr. Baroin said financial markets must not doubt the euro zone will carry out modifications to its bailout facility, including the "important" step of allowing it to buy bonds in the secondary market. That would take some pressure off the ECB and its Securities Market Program, but the changes to the European Financial Stability Facility require the approval of many national parliaments in the euro zone.
Still, democracy isn't as fast as the click of a trader in the market, Mr. Baroin said. France has already called a special parliamentary session Sept. 6, bringing its lawmakers back early from holidays to approve the EFSF changes.
Mr. Baroin also said the euro-zone fund will be expanded if necessary. "The envelope is €440 billion and we have already said if we need to go further we will go further," he said. France currently holds the presidency of the Group of 20 as well as the G-7.
Finance ministers and central-bank chiefs from the G-20 said Monday they were prepared to act in coordination to stabilize financial markets and protect economic growth, and would act as necessary to "ensure financial stability and liquidity in financial markets." The announcement followed a similar statement early Monday from G-7 authorities. Together they underscored the growing alarm about the plunge in stock markets and the fallout from S&P's move to cut the U.S. credit rating.
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