Aug. 3 (Telegraph) -- The European Central Bank is expected
to signal it is stepping into the eurozone debt crisis on
Thursday by reopening its purchases of government debt, amid
fears the turmoil will claim the economy of a nation that is "too
big to bail".
Officials on Wednesday night said the ECB's monthly meeting
was expected to see a reversal on the buying of sovereign bonds
after 18 weeks of staying out of the markets, because of an EU
institutional vacuum that threatens to drag down Italy and Spain,
the region's third and fourth-largest economies.
With EU officials scrabbling to fine-tune changes to allow
the eurozone's €440bn (£384bn) bail-out fund to intervene in the
markets, central bankers are expected to reluctantly accept the
precedent of allowing ECB bond buy-backs in May 2010.
Measures allowing the European Financial Stability Facility
(EFSF), the bail-out fund created last summer, new powers to buy
the bonds of struggling countries were agreed at an emergency
euro summit on July 21 in an attempt to protect Italy (whose
public debt and bank exposure is shown in the interactive graphic
above) and Spain.
However, legally changing the basis of the EFSF and
ratifying the changes in 17 eurozone countries, where the
expanded fund's role is controversial in German, Dutch and
Finnish parliaments, could take weeks or even months, leaving a
dangerous vacuum.
"We're watching the ECB which, unlike the eurozone, can
intervene now and build a bridge until the EFSF can take up its
new role in the autumn," said an official.
Meanwhile, European Commission President Jose Barroso urged
governments to quickly approve the beefed-up fund, warning of
market fears leaders have not found a "systemic" solution.
The need for a buyer of last resort is intensifying as the
yield, or implied interest rates, on Italian and Spanish
government debt sticks above the 6pc mark, well into the danger
zone. Markets spooked by the recent threat of a US default have
now returned their focus to the eurozone crisis, amid fears over
a global economic slowdown which will make struggling nations'
debts even harder to support.
Italy and Spain are seen as too big to rescue under the
current system, which has already bailed out Greece (twice),
Ireland and Portugal.
Silvio Berlusconi, the Italian prime minister, on Wednesday
night insisted markets were misreading Italy's "solid economic
fundamentals" after Rome's main FTSE MIB index closed down 1.5pc,
leaving it 27pc off its recent peak in mid-February.
However, Italy, with a debt equivalent to 120pc of GDP, is
on an unsustainable path and "bound to default" on its
obligations, while Spain is better placed but may still get
dragged down in the turmoil, according to forecasts from the
Centre for Economics and Business Research. The think-tank is now
"pessimistic" about the euro's survival. If one country defaults
other euro members will face higher borrowing costs, making
devaluing their currency by leaving the monetary union more
attractive, it said.
to signal it is stepping into the eurozone debt crisis on
Thursday by reopening its purchases of government debt, amid
fears the turmoil will claim the economy of a nation that is "too
big to bail".
Officials on Wednesday night said the ECB's monthly meeting
was expected to see a reversal on the buying of sovereign bonds
after 18 weeks of staying out of the markets, because of an EU
institutional vacuum that threatens to drag down Italy and Spain,
the region's third and fourth-largest economies.
With EU officials scrabbling to fine-tune changes to allow
the eurozone's €440bn (£384bn) bail-out fund to intervene in the
markets, central bankers are expected to reluctantly accept the
precedent of allowing ECB bond buy-backs in May 2010.
Measures allowing the European Financial Stability Facility
(EFSF), the bail-out fund created last summer, new powers to buy
the bonds of struggling countries were agreed at an emergency
euro summit on July 21 in an attempt to protect Italy (whose
public debt and bank exposure is shown in the interactive graphic
above) and Spain.
However, legally changing the basis of the EFSF and
ratifying the changes in 17 eurozone countries, where the
expanded fund's role is controversial in German, Dutch and
Finnish parliaments, could take weeks or even months, leaving a
dangerous vacuum.
"We're watching the ECB which, unlike the eurozone, can
intervene now and build a bridge until the EFSF can take up its
new role in the autumn," said an official.
Meanwhile, European Commission President Jose Barroso urged
governments to quickly approve the beefed-up fund, warning of
market fears leaders have not found a "systemic" solution.
The need for a buyer of last resort is intensifying as the
yield, or implied interest rates, on Italian and Spanish
government debt sticks above the 6pc mark, well into the danger
zone. Markets spooked by the recent threat of a US default have
now returned their focus to the eurozone crisis, amid fears over
a global economic slowdown which will make struggling nations'
debts even harder to support.
Italy and Spain are seen as too big to rescue under the
current system, which has already bailed out Greece (twice),
Ireland and Portugal.
Silvio Berlusconi, the Italian prime minister, on Wednesday
night insisted markets were misreading Italy's "solid economic
fundamentals" after Rome's main FTSE MIB index closed down 1.5pc,
leaving it 27pc off its recent peak in mid-February.
However, Italy, with a debt equivalent to 120pc of GDP, is
on an unsustainable path and "bound to default" on its
obligations, while Spain is better placed but may still get
dragged down in the turmoil, according to forecasts from the
Centre for Economics and Business Research. The think-tank is now
"pessimistic" about the euro's survival. If one country defaults
other euro members will face higher borrowing costs, making
devaluing their currency by leaving the monetary union more
attractive, it said.
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