EU Struggles to Tame Crisis as Spain

FRANKFURT—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 the 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.

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.

German Chancellor Angela Merkel and French President Nicolas Sarkozy plan to speak by phone later today, their offices said. The European Commission called for an expansion of the European Financial Stability Facility, the 440 billion-euro ($623 billion) rescue fund, earning a rebuke from Germany.

“It’s important to constantly review if there is a need to further reinforce the EFSF in terms of its size,” European Union Economic and Monetary Commissioner Olli Rehn said in a Bloomberg Television interview in Brussels. German Economy Minister Philipp Roesler rejected taking more measures.

Europe’s government leaders were back in the spotlight after a divided ECB restarted its bond-purchase program yesterday following a four-month hiatus. The central bank refused to extend the purchases to Italy and Spain, the two countries at the center of the current turmoil.

“Would the ECB please get serious?” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in an e-mailed note. Limiting the bond-buying to Ireland and Portugal brings to mind “a fire brigade that responds to a major emergency but then drives to the wrong place and refuses to turn around and douse the real fire.

Spanish and Italian bonds rallied on speculation that policy makers may take more action to arrest the crisis. Ten- year yields dropped 22 basis points to 6.06 percent in Spain and 4 basis points to 6.16 percent in Italy.

The euro was up 0.8 percent at $1.4207 at 4:15 p.m. in Brussels.

Over the opposition of the German central bank, the ECB bought bonds of Ireland and Portugal yesterday, two countries drawing on official aid. It did so again today, according to two people with knowledge of the transactions. The ECB stopped short of buying Italian bonds, and ECB President Jean-Claude Trichet said Italy has to show it is “ahead of the curve” in taming its debt.

A clash over the size of the bailout fund flared between European officials and Germany, the biggest underwriter of aid packages to Greece, Ireland and Portugal.

A call by Jose Barroso, commission president, for a review of “all elements” including the fund’s size was rejected today by Germany’s Roesler.