Details of a new bond buying plan by the European Central Bank (ECB) fueled a surge in some Spanish and Italian debts and increased mediated talks between European leaders.
German Chancellor Angela Merkel met with the President of the European Union (EU) Herman van Rompuy in Berlin on Tuesday, while French President François Hollande travelled to Rome for a meeting with Italian Prime Minister Mario Monti. The meetings came after President of the ECB Mario Draghi said he would be comfortable buying three year government bonds to aid European nations struggling for funding.
Merkel has indicated that Germany would support a more proactive role at the ECB to combat the economic crisis.
“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 realising that monetary policy is broken in Europe, badly broken.”
The Euro fell 0.2 percent against the dollar yesterday, sitting at $1.2574 by 3.15pm Berlin time after trading on a near two month high, while Italian two year yields suffered the largest drop in a month and falling to the lowest level since March; 25 basis points to 2.38 percent. Spain’s two year yield fell 36 basis points to 3.25 percent. Spain and Italy’s two year yields were at an all-time on-record low relative to ten year bonds, while Germany’s ten year bond yields rose by three basis points, to 1.4 percent. Germany and Italy disagreed last week in Berlin over the details of a broad collective action. Merkel insisted on focusing efforts on budget rigour, while Monti advocated for flexibility on market intervention.
“We have to press for reforms in other countries even if they sometimes say we’re hard-line,” Merkel said, addressing a crowd in 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.”
It is expected that Draghi may provide additional details on the ECB’s bond-buying plans on 6 September, when he holds his first press conference after the summer break. Greece will be one of the points discussed by ECB as policy makers anticipate a bailout progress report, due next month, from the principal creditors of the nations; the European Commission, the ECB and the International Monetary Fund.