ECB to fight debt crisis with major bond purchases
(FRANKFURT) - The European Central Bank said it would make major purchases of eurozone government bonds in the latest move to stem a debt crisis that has world leaders scrambling for a global response.
The ECB said it would "actively" renew the bond purchases after Italy and Spain announced new measures and reforms to boost their economies and France and Germany pushed for full and rapid implementation of terms agreed at an emergency summit last month.
Political leaders scrambled on three continents to show they were in control at a critical juncture and could stave off a repeat of the 2008 global economic crisis.
Ahead loomed the opening of Asian financial markets on Monday, when the full impact of an unprecedented US credit ratings downgrade was also to become apparent.
Eurozone debt markets will be focused on any purchases of bonds issued by Italy and Spain, the third- and fourth-biggest eurozone economies, for signs of ECB activity.
The central bank itself never identifies which bonds it buys.
Meanwhile, Germany and France, the two biggest eurozone economies, pressed for full implementation of the bloc's latest emergency measures to protect the single currency as stock markets also braced for more turmoil this week.
"President (Nicolas) Sarkozy and Chancellor (Angela) Merkel reiterate their commitment to fully implement the decisions taken by the heads of state and government of the euro area and the EU institutions on July 21," a joint statement said Sunday.
"In particular, they stress the importance that parliamentary approval will be obtained swiftly by the end of September in their two countries," it added.
Officials from the Group of 20 and Group of Seven economies held emergency conference calls and leaders of major powers worked the phones ahead of the opening of New Zealand financial markets, the first to trade in Asia.
In a sign of a possible storm ahead, the Israeli market fell seven percent Sunday and major Gulf markets also tumbled as investors digested Standard & Poor's historic cut in the the US rating to AA+ from the top notch triple-A.
In Washington, the US Treasury said Secretary Timothy Geithner will not step down despite opposition calls for him to leave because of the downgrade.
"Until the stock markets open (Monday) the extent of earthquake caused by the downgrade of the US debt rating will not be known," Spanish newspaper El Pais said.
"But everything points to a black Monday which may intensify the attacks on the euro."
News of the US downgrade hit on Friday after Western markets ended a week with some of their worst losses since 2008.
Fears of a global meltdown, which some see as potentially worse than the 2008 collapse, sent vacationing leaders into a flurry of phone calls between Berlin, London, Paris and Washington to stem the tide.
Officials from G7 nations -- Britain, Canada, France, Germany, Italy, Japan and the United States -- confirmed a need for ministerial talks on market stability, Japan's Kyodo News agency said, quoting unnamed sources.
For its part, the ECB announced that it "will actively implement its Securities Markets Programme," which it set up to buy bonds issued by eurozone governments on secondary markets.
The programme has stirred controversy among ECB governors, some of whom say it eases pressure on governments to get their finances in order.
The ECB is the only European Union (EU) institution capable of acting fast and mustering enough financial firepower to convince markets not to test Italy and Spain, but at the cost of possibly fueling inflation and damaging its own independence and credibility.
"The central bank is the only institution that can act quickly, and without a budget constraint," Goldman Sachs analyst Francesco Garzarelli noted.
It is also the eurozone's last line of defence because investors no longer believe that "politicians have a strategy for dealing with Italy and Spain," noted Will Hedden, a trader at IG Index.
Italy, the eurozone's third largest economy, saw its borrowing costs hit record highs last week amid falling confidence over its massive debt -- equal to 120 percent of total annual output -- along with poor growth prospects and political tensions.
Italian Prime Minister Silvio Berlusconi vowed lawmakers would return early to push through additional austerity measures including a constitutional amendment to force governments to keep balanced budgets.
Spain announced new reforms to bring in an additional 4.9 billion euros ($7.0 billion) and help curb its public deficit.
An ECB statement said it considered "decisive and swift implementation by both governments as essential."
Meanwhile, the EU's executive Commission, the ECB and the European Financial Stability Facility (EFSF) are "working night and day to put flesh on the bones" of an agreement struck at the July 21 summit, EU economic affairs commissioner Olli Rehn said.
The summit agreed to modify a crisis rescue pot -- the 440-billion-euro ($625 billion) EFSF -- so it could help troubled banks and buy government bonds, a first step to something like a European version of the International Monetary Fund.
If national parliaments ratify the changes as swiftly as hoped, the euro's new emergency financial framework could be in place in September.
But parliaments in some northern nations, especially Germany where taxpayers are loathe to pay bills for the likes of Greece, might balk at approving more EFSF funds needed to help Italy and Spain.