FRANKFURT - The European Central Bank increased the bond purchases that have helped ease pressure on indebted governments from the eurozone debt crisis last week. The bank bought €462 million ($598 million) in bonds, up from a bare €19 million the week before.
It was a modest boost to a program that has been a major topic of debate in Europe's debt crisis. France and Italy as have urged the ECB to step up the purchases, which help hold down the elevated borrowing costs that are putting pressure on heavily indebted governments. As recently as the week ending Dec. 16, the bank spent some €3.4 billion.
The program has helped the eurozone avoid a financial meltdown because the eurozone lacks another convincing short-term financial backstop to assure bond investors that an indebted government won't default.
But European Central Bank President Mario Draghi has resisted pressure to step up the purchases, saying governments must not rely on a central bank bailout but instead make politically difficult choices to cut deficits and improve growth. Interest rate yields on Italy's 10-year bonds remained elevated Monday at 6.91 per cent.
Yields above the 7 per cent level pushed Greece, Ireland and Portugal to seek bailouts from other eurozone countries and the International Monetary Fund because they could no longer borrow affordably. Countries must borrow by selling bonds to pay off older bonds as they mature; if market fears of default, or nonpayment, push borrowing costs too high, governments can find themselves cut off from credit. In that case they must seek a bailout or default.
While the three small countries could be rescued, economists say Italy, the eurozone's third largest economy with some €1.9 trillion in outstanding debt, would strain the limited resources available for rescue. A default, on the other hand, could trigger a full-blown banking and economic crisis.
The eurozone bailout funds have €500 billion in financing available, and much of that is committed to previous bailouts. Another rescue option — jointly guaranteed eurobonds — would take time to implement and probably require a change in the EU's basic treaty.
Draghi's resistance to larger-scale bond buys has been strongly backed by Jens Weidmann, head of Germany's Bundesbank central bank. Weidmann says large-scale purchases that involve creating new money would violate the bank's mandate to fight inflation, which can be worsened by printing money. He has also argued it would undermine the bank's independence if it is seen as giving in to pressure to help government finances.
Analyst say the bank may eventually have to resort to such purchases to avoid a catastrophe, but that Weidmann's vocal opposition is an obstacle to Draghi changing course. Dissent from the central bank in the eurozone's largest country would undermine the ECB's ability to convince markets that it is serious about holding down bond yields.
Rising bond yields, however, are one factor keeping pressure on reluctant Italian politicians to cut government spending and shake up their bureaucracy-clogged economy so it can grow faster.