European leaders are stepping up shuttle diplomacy this week as details of a bond-buying plan emerged from the central bank, fueling a surge in some Spanish and Italian debt.
European Union President Herman Van Rompuy traveled to Berlin for talks with German Chancellor Angela Merkel as Italian Prime Minister Mario Monti hosts French President Francois Hollande in Rome. They were given a hint about what may be in store when European Central Bank President Mario Draghi said yesterday he would be comfortable buying three-year government bonds to aid nations struggling to fund themselves.
The stewards of the single currency, who have sparred as borrowing costs diverged in the 17 nation-euro area, have a chance to fall in line behind Draghi. Merkel, whose country shoulders the largest cost of bailing out weaker governments, has indicated she would back a more active crisis-fighting role at the ECB and yesterday told a crowd of beer drinkers in Bavaria that Germany must show solidarity with Europe.
“I think there is broad agreement among these people,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole Corporate & Investment Bank in London. “Many people are realizing that monetary policy is broken in Europe, badly broken.”
The euro fell 0.2 percent to $1.2574 at 15:15 in Berlin, paring earlier gains when it traded near a two-month high. Italian and Spanish two-year yields dropped the most in about a month. In both countries, the two-year yield fell to the least on record relative to 10-year bonds.
Leaders are back from summer vacation and facing what Merkel called a “very ambitious agenda” this month to quell what has been a three-year sovereign debt crisis. Talks haven’t always gone smoothly, as Merkel and Monti clashed last week in Berlin over details while agreeing on the broad principles of collective action. Monti has pushed for flexibility on market intervention, while Merkel has focused on budget rigor.
“We have to press for reforms in other countries even if they sometimes say we’re hard-line,” Merkel said to a packed beer tent in the town of Abensberg, northeast of Munich. “It’s not enough just to keep muddling through. But I also say that in such a difficult phase these countries deserve our solidarity and that we root for them to overcome their difficulties.”
Draghi told lawmakers in a closed-door meeting that purchasing short-dated bonds doesn’t constitute state financing, according to France’s Jean-Paul Gauzes, a member of the European Parliament from the European People’s Party. “He thinks it’s not a violation of the treaty and you can do it under the current legal framework,” Gauzes said. “He said for example three years is OK, 15 years no.”
Italian two-year yields fell 25 basis points to 2.38 percent, the lowest since March, while the yield on similar maturity Spanish debt declined 36 basis points to 3.15 percent. Italian 10-year bond yields declined 11 basis points to 5.67 percent, or 329 basis points more than the two-year note. German 10-year bond yields rose 3 basis points to 1.4 percent.
Draghi may give more details on the bank’s bond buying plans when he holds his first press conference after the summer break on Sept. 6. That day Monti will meet with European Commission President Jose Barroso, and Merkel will travel to Madrid to talk with Spanish Prime Minister Mariano Rajoy. Leaders are also awaiting a German court ruling on the constitutionality of the European Stability Mechanism, the region’s permanent bailout fund. That court case has delayed the start of the ESM, initially set for July.
German Finance Minister Wolfgang Schaeuble said yesterday he was “completely sure” the ESM will come into force.
Greece will also be on the agenda as policy makers await a bailout progress report due next month from the country’s creditors -- the European Commission, the European Central bank and the International Monetary Fund. Greece is trying to showing that it’s making enough progress meeting conditions on the loans to keep the aid spigot open.
“The central point is that Greece implements its obligations completely,” the German Finance Ministry said in a statement after Schaeuble met with his Greek counterpart, Yannis Stournaras, in Berlin today.
On the bond buying, Draghi still faces challenges in winning support among the German public for market intervention. Germany reiterated its backing yesterday for Bundesbank President Jens Weidmann yesterday, following reports last week that he had considered resigning over his opposition to ECB bond purchases. Schaeuble warned investors not to expect too much from the ECB plan.
“We have to be very careful that we don’t raise false expectations,” Schaeuble told Deutschlandfunk radio yesterday. “It has to remain very clear, state debt can’t be financed through monetary policy. Therefore we can’t have a decision — we would think it very wrong — that’s not covered by the ECB mandate.”
Monti, who raised taxes and cut spending to improve Italy’s finances, has shifted his focus to stimulating the stagnant economy and found an ally in Hollande. The French president is facing pressure at home following a summer break in which, according to a Viavoice poll, unemployment rose and his popularity fell seven points to 55 percent.
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