Euro zone central banks started buying up government bonds on Monday, in a reversal of the European Central Bank's resistance to full-scale asset purchases as it fights to contain Greece's debt crisis.
ECB President Jean-Claude Trichet gave no indication of how much central banks were prepared to spend on their unprecedented bond-buying program but said they were doing what was necessary.
He rejected criticism the central bank had bowed to political pressure with its contribution to a $1 trillion rescue package to stop contagion spreading.
"We are fiercely and totally independent. This decision is the decision of the Governing Council, and not the result of any kind of pressure of any sort," Trichet told reporters on the sidelines of meetings at the Bank for International Settlements.
The decision to buy bonds did not enjoy unanimous support among the ECB's 22 policymakers, some of whom — including Germany's Axel Weber — had been critical of such proposals in the past and had dug in their heels to stop the ECB following other central banks into money-printing exercises.
Trichet said the decision, sealed at a weekend conference call, just days after he said the Governing Council failed to even discuss the issue at its Thursday policy meeting, was carried by an "overwhelming majority."
"For us, what is absolutely decisive is the commitment of governments of the euro area to take all measures needed to meet their fiscal targets this year and in the years ahead," he said. "It is absolutely crucial, absolutely essential."
Central banks wasted no time putting the decision into practice.
Bond market sources told Reuters the Bank of Italy was in the market to buy Italian and Greek bonds, while the Bank of France, the Bank of Finland, the Slovenian central bank and the German Bundesbank confirmed they too had begun buying bonds.
Boosting its firepower further, the ECB will also restart U.S. dollar lending operations, and bring back some of the emergency liquidity measures it had started to phase out.
Trichet said it seemed observers had understood the importance of the ECB's move, after the euro rallied above $1.30 and European shares shot up six percent, while the premium investors demand to hold Greek government bonds plummeted by nearly 600 basis points.
Greece's debt crisis had driven the cost of its sovereign debt and its insurance to record levels.
The problems had also started to push up debt costs for other euro zone members with strained public finances such as Portugal, Spain and Ireland.
"This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion," said Marco Annunziata from UniCredit Group in London.
"Not only is the headline number stunning, but the ECB's decision to intervene in the secondary market should offset concerns about the time it will take to deploy the stabilization funds," Annunziata said.
The fact that the bond purchases will be offset by liquidity absorbing operations means they will not have the same potential impact on inflation as straight purchases, such as those undertaken by the U.S. Federal Reserve and the Bank of England.
Trichet said one simple and effective option to absorb funds would be accepting term deposits.
Asked if economists' estimates of purchases of 200-300 billion euros were reasonable, he said: "The Governing Council will decide on the scope of the interventions. At this stage we will do what is necessary."
In a setback for its exit strategy, the ECB said it would hold its next two three-month liquidity operations at a fixed interest rate with full allotment, rather than the planned competitive tenders.
It will also return to six-month loans, offering banks all the money they ask for on May 12 at a fixed interest rate linked to the main refinancing rate, currently 1 percent.
European laws prevent the ECB from buying debt directly from governments in the way the U.S. and British central banks have done during the financial crisis, but not on the secondary market.
The ECB announced a 60 billion program to buy covered bonds last year, but this will be its first foray into buying government debt.
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