ECB Resumes Bond Purchases to Help Indebted Eurozone Governments

Posted August 4th, 2011 at 1:00 pm (UTC-5)
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The European Central Bank says it has resumed purchases of bonds from indebted governments to help them overcome a debt crisis that some investors fear could draw in big economies like Italy and Spain.

ECB President Jean-Claude Trichet said Thursday the bank's governing council voted in favor of buying more government bonds, but he did not specify the names of the debt-issuing nations. Traders said they observed the ECB intervening in eurozone debt markets as Trichet spoke.

Increased demand for government bonds tends to drive down the yield, or interest rate, those governments must offer to the bond purchaser. The yield on Italy's 10-year government bond fell back below 6 percent Thursday, after soaring above that level to a new euro-era high a day earlier. Spanish yields also declined after rising Wednesday.

In another ECB move, Trichet says the central bank agreed to provide six months' worth of additional funds to European banks that hold large amounts of bonds issued by debt-ridden eurozone nations.

European Commission President Jose Manuel Barroso says the eurozone must prevent the debt crisis from spreading by increasing the size of a rescue fund already used to bail out Greece, Italy and Portugal.

In a letter to eurozone leaders published Thursday, Barroso urges a “rapid reassessment of all elements” of the rescue fund to ensure that it can pre-empt the need for bailouts of Italy and Spain, whose economies are much larger.

Eurozone leaders widened the role of the fund at a July 21 summit, but they kept its size the same. The fund is known as the European Financial Stability Facility. It was given new powers to buy bonds and to provide credit to heavily indebted countries before they risk a debt default.