ECB sources said the central bank decided to buy Italian bonds to try to stem the euro zone's debt crisis from widening in a conference call yesterday evening (7 August).
As central bankers conferred, Germany and France released a statement that said the euro zone's bailout fund would soon be able to buy government bonds of debt strugglers Italy, Spain, Greece, Portugal and Ireland.
ECB President Jean-Claude Trichet wants the policy-setting governing council to take a final decision on buying Italian paper after Prime Minister Silvio Berlusconi announced new measures on Friday to speed up deficit reduction and hasten economic reforms, one source said.
"Trichet wants the governing council to make a final decision on purchases of Italian bonds. If the governing council agrees, the Eurosystem would start on Monday," the ECB source said, speaking on condition of anonymity.
Another source said the council would also discuss possible emergency liquidity measures to prevent money markets freezing.
The Eurosystem comprises the ECB and national central banks of the 17 countries that share the single currency.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said they were committed to getting approval from their parliaments for new powers for the European Financial Stability Facility rescue fund by the end of September.
That will allow the EFSF to buy government bonds in the secondary market if the ECB thinks it is warranted and if euro zone member states agree, potentially absolving the ECB of the need to do so directly, something some members strongly oppose.
"France and Germany are confident that the ECB analysis will provide the appropriate basis for secondary market interventions as it will help determine the case when financial stability of the euro zone as a whole is at risk," the leaders said.
Their statement reiterated the agreement at last month's emergency euro zone summit which granted a second bailout to Greece, but the focus on the EFSF's ability to buy government bonds once the bloc's parliaments have ratified its new powers could act as an encouragement to the ECB to do the same in the interim.
Twin debt crises in Europe and the United States are causing global market turmoil and stoking fears of the rich world sliding back into recession.
Another source said the ECB meeting had been put back into the evening to see what measures U.S. authorities were prepared to take to calm markets after credit ratings agency Standard & Poor's downgraded Washington's AAA rating to AA+ on Friday.
"The important part of the picture now is the US," the second source said.
G7 To confer
Finance ministers of the Group of Seven major industrialised nations are to hold a teleconference late on Sunday (European time) to discuss a response to the crisis after senior officials conferred by telephone late on Saturday.
"I don't think that central banks can do very much in case of new trouble. What is in the discussion (in the ECB) is to calm money markets with fresh liquidity if necessary," the ECB source said.
The second source said: "What we can start doing tomorrow is buying bonds or put additional money in the market."
The ECB reactivated its controversial sovereign bond-buying programme last Thursday but has so far only bought small quantities of Irish and Portuguese bonds, seeking more front-loaded austerity measures from Italy.
Italian and Spanish 10-year bond yields spiked to 14-year highs when investors saw the central bank was not buying their paper.
Under pressure from his EU peers and the central bank, Berlusconi announced late on Friday plans to bring forward balancing the budget by one year to 2013, enshrine a balanced budget rule in the constitution and push through welfare and labour market reforms after talks with trade unions and employers.
Merkel and Sarkozy welcomed the new Italian plan.
"Especially the Italian authorities' goal to achieve a balanced budget a year earlier than previously envisaged is of fundamental importance," they said (see Joint Statement in Positions).
However, details of Italy's austerity drive are thin, leaving many analysts -- and maybe some in the ECB -- sceptical.
The ECB remains divided over whether to buy bonds at all, with four German, Dutch and Luxembourg members of the 23-member council opposed, ECB sources said. Even some of those in favour say Italy should do more to front-load its reforms.
After a week that saw $2.5 trillion wiped off global stock markets, political leaders are under pressure to reassure investors that Western governments have both the will and ability to reduce their huge and growing public debt loads.
That has raised pressure on the ECB to act to calm bond markets until the euro zone's 440-billion-euro rescue fund is empowered to intervene on secondary bond markets and give countries in difficulty precautionary credit lines.
It has also prompted widespread calls from economists and market analysts for the euro zone to at least double the size of the European Financial Stability Facility -- a move that EU paymaster Germany and its close ally France has rejected as unnecessary.
EurActiv with Reuters
