Europe Central Bank signals wider bond purchases

The European Central Bank is now open to purchasing government bonds of Italy and Spain, though has made no firm commitment to do so, according to people familiar with the matter. Buying bonds of the two countries, which together issue roughly €600 billion ($857 billion) of government bonds a year, would be a major step for the central bank. Until this week, the ECB had bought less than €80 billion of Greek, Portuguese and Irish government bonds. ECB watchers had assumed that there wasn’t appetite for such a drastic escalation. The bank’s decision on Thursday to restart, after a four-month gap, purchases of Irish and Portuguese bonds was opposed by at least three members of the 23-strong ECB board, including by the head of the powerful German Bundesbank. Many analysts said those purchases needed to be broadened to Spain and Italy in order to keep the debt crisis that began almost two years ago in Greece from threatening those countries. Friday’s signal came as a relief to investors concerned that central bankers might sit idly by while Europe’s debt crisis engulfed the euro zone’s third- and fourth-largest economies. An ECB spokeswoman declined to comment. The bank, which has generally preferred to see national governments get their own finances in order, urged Italy and Spain to accelerate the pace of fiscal austerity and economic reform, according to people familiar with the matter, though reforms won’t necessarily bring bond purchases. Italy on Friday announced new steps to speed up fiscal consolidation. The ECB “is ready to make major efforts to help the situation, but countries have to do what is necessary first, otherwise it’s just like pouring water into a bucket with a hole in it,” Belgium’s central bank governor Luc Coene told a Belgian radio station early in the day. ECB President Jean-Claude Trichet on Thursday suggested he was waiting for Italy to make the first move, saying it was “urgent” for European countries to front-load economic reforms, “and for Italy of course.” Any enthusiasm from Mr. Trichet’s announcement on Thursday that the central bank was back in the market buying bonds was quickly damped by reports from bond traders that the ECB was only buying Irish and Portuguese debt. The central bank discloses how much it buys in bonds, but doesn’t say which countries’ bonds it bought. One way for the ECB to buy Spanish and Italian debt in the short run without burdening its balance sheet too much would be for European parliaments to quickly approve agreements to give Europe’s rescue fund, the European Financial Stability Facility, the power to buy bonds. That would allow the ECB to exit the bond market as governments take over the crisis-fighting burden. Yields on 10-year Spanish and Italian government bonds moved above 6% this week, a threshold many analysts see as unsustainable given the weakness of those economies and the rising debt loads they carry. Meanwhile, weak figures from Germany, Italy and Spain on industrial output—which has been the main driver of euro-zone economic expansion—provided further evidence that the region’s economy is slowing. At a news conference after the ECB’s monthly meeting Thursday, Mr. Trichet broke from tradition by personally delivering the message that the central bank was back in the market buying bonds. He has in the past declined to make such comments, leaving financial markets to wait for a weekly report released Mondays on any ECB bond activity. The central bank discloses how much it buys in bonds, but doesn’t say which countries’ bonds it bought.