Tags: Europe | Crisis | italy | spain

Europe Struggles to Tame Crisis as ECB Fails to Stop Contagion

Friday, 05 Aug 2011 07:20 AM

European leaders hunted for solutions to the rampaging debt crisis after the resumption of the European Central Bank’s bond-buying program failed to prop up securities in Italy and Spain.

As global stock markets sank for an eighth day, the European Commission called for another reinforcement of the European Financial Stability Facility, the 440 billion-euro ($623 billion) rescue fund for distressed euro-area states.

“To be effective, the EFSF needs to be credible and respected by the markets,” European Union Economic and Monetary Commissioner Olli Rehn said on BBC Radio 4’s Today program.

Europe’s fractious 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.

German Chancellor Angela Merkel and French President Nicolas Sarkozy, leaders of the euro region’s two largest economies, plan to speak by phone later today, a Sarkozy aide said. The French leader will also call Spanish Prime Minister Jose Luis Rodriguez Zapatero.

World stock markets have lost more than $4.4 trillion since July 26 as speculation mounts that the global economy faces a new recession that would deepen Europe’s debt woes.

Over the opposition of the German central bank, the ECB bought bonds of Ireland and Portugal yesterday, two countries drawing on official aid. 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.

‘Major Efforts’

“Certainly the ECB is ready to make major efforts to relieve the situation, but first the countries have to take steps,” ECB council member Luc Coene told RTBF radio in Brussels today. “It doesn’t make sense to pour water into a bucket with a hole in it.”

Italian and Spanish bonds were little changed today after lagging German bonds, the benchmark for Europe, yesterday. Italy’s extra 10-year yield over German bonds rose 3 basis points to 392 basis points as of 9:45 a.m. in Brussels, while Spain’s dipped 2 basis points to 396 basis points.

The euro rebounded from yesterday’s 1.6 percent drop. It was up 0.5 percent at $1.4163 at 9:45 a.m. Brussels time.

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