The
sources said the central bank's Governing Council remains divided over
whether to buy Italian bonds and even some of those who favor the move
say Italy should do more to front-load austerity measures first. Three
sources said ECB President Jean-Claude Trichet has called a
teleconference of the policy-setting council for Sunday afternoon to
discuss the continuing turmoil on financial markets and how to respond
to Italy's latest reform pledges. "Tomorrow afternoon, the ECB will
hold a conference call to discuss the general situation and possible
measures that the ECB could take," one monetary source said. The
decision by credit ratings agency Standard & Poor's to downgrade the
United States' AAA rating to AA+ on Friday seems bound to aggravate
turbulence when markets reopen on Monday. Finance ministers and
central bankers of the Group of Seven industrial powers, including
Trichet, are to hold a conference call on the market turmoil on Sunday, a
senior European diplomatic source said. Italian and Spanish bond
yields hit 14-year highs above 6 percent last week even after the ECB
decided to resume buying bonds of euro zone sovereigns in difficulty,
because it limited its purchases to Irish and Portuguese bonds. ECB
policymakers made clear that Rome would have to accelerate fiscal and
structural economic reforms before the central bank would consider
buying Italian debt. Prime Minister Silvio Berlusconi announced
late on Friday he would bring forward measures to balance the budget by
one year to 2013, anchor a balanced budget rule in the constitution and
push through welfare and labor market reforms after talks with labor
unions and employers. Asked whether the announcement, made under
strong pressure from European Union peers and the central bank, was
enough to persuade the ECB to buy Italian bonds, once ECB source said:
"I'm not sure that it's sufficient but it is going in the right
direction. "They should do a bit more because the Italian program
is still back-loaded and most of the measures still don't bite until
after the 2013 election," the source said. Other ECB sources said
that the four German, Dutch and Luxembourg members of the 23-member
Governing Council who voted against re-activating the ECB's bond-buying
program last Thursday remained opposed to the move in principle. "In
case of such a 'deal' with the Italians, the ECB would ultimately be
leaving the area of monetary policy," one source in that camp said. Another
said Trichet and the majority of the ECB council seemed willing to
"play a game" with the Italians, but that would depart from the central
bank's proper role as responsible for monetary policy. ECB sources
said it would require a further decision of the Governing Council to
authorize the purchase of Italian and Spanish bonds, but this could be
taken quickly by teleconference if the conditions were met. European
Economic and Monetary Affairs Commissioner Olli Rehn praised the
Italian moves in a first official EU reaction and said swift
implementation would now be crucial. Asked in a telephone interview
with Reuters whether the Italian moves were sufficient to persuade the
ECB to buy Italian bonds, Rehn said he could not speak for the central
bank, which is independent from political authorities. However, he
said: "The commission's view is that the fiscal strategy is striking the
right balance. The essential thing is rigorous implementation."
