ROME — European leaders stepped 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 met with German Chancellor Angela Merkel on Tuesday in Berlin, while Italian Prime Minister Mario Monti hosted Francois Hollande in Rome, with the French President saying that issues tied to bailouts in Greece and Spain must be settled before euro countries take steps to forge a closer banking and economic union.
While Monti and Hollande reiterated that it was up to the European Central Bank to decide how to intervene in markets, ECB President Mario Draghi said the bank’s primary mandate compels it to intervene in bond markets to wrest back control of interest rates and ensure the euro’s survival.
“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 stewards of the single currency, who have sparred as borrowing costs diverged in the 17 nation-euro area, seem to be falling in line behind Draghi’s plans.
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 Monday told a crowd of beer drinkers at a political rally in Bavaria that Germany must show solidarity with Europe.
With the next summit of European heads of state and government planned for Oct. 19, leaders are unable to move forward until after elections in the Netherlands on Sept. 12 and a German court ruling on the constitutionality of the European Stability Mechanism, the region’s permanent bailout fund, expected the same day.
The euro fell 0.3 percent to $1.2562, erasing earlier gains when it traded near a two-month high. Italian and Spanish two-year yields dropped the most in about a month.
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. “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. “If we are to buy long-term bonds we are in a very delicate situation," he told the lawmakers. “But if we go on the short-term part of the market where bonds have a length of time, a maturity of up to one year, two years or even three years, these bonds will easily expire, so there is very little monetary financing if anything at all that we are doing."
Italian two-year yields fell 26 basis points to 2.37 percent, the lowest since March, while the yield on similar maturity Spanish debt declined 44 basis points to 3.07 percent. Italian 10-year bond yields declined 10 basis points to 5.67 percent. Spanish 10-year bond yields fell 28 basis points to 6.57 percent.
Draghi may give more details on the bank’s bond buying plans when he holds his first news conference after the summer break on Thursday. 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.
Hollande suggested Tuesday that Spain had to decide how it wants its European partners to help with a budget shortfall exacerbated by its need to re-capitalize banks hurt by a collapsing real estate bubble. “We have to settle the question of Spain, whether they take part, if they wish, in this or that plan," Hollande said at a joint news conference with Monti.
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 show that it’s making enough progress on the loans to keep the aid spigot open.