Eurozone 'will buy debts to save Italy'

Published on Sunday 7 August 2011 17:55

THE European Central Bank (ECB) last night announced it was ready to implement a bond-buying programme in an attempt to stop the eurozone plunging into deeper financial crisis.

In a statement, the bank said it welcomed announcements that Spain and Italy – countries now at the centre of the debt crisis – had planned new economic policy measures, and it urged both to roll them out swiftly.

ECB president Jean-Claude Trichet confirmed that the bank had decided to "actively implement" its Securities Markets Programme by intervening in the market to ensure stability.

The statement did not specify what form the action would take, but it is understood that the bank will buy up Italian and Spanish government bonds with the aim of driving down the interest yields which threaten their shaky budgets.

However, despite last night's announcement, it is thought that stock markets across the globe will be braced for financial carnage again today, with traders expected to ditch shares as fears about the United States and eurozone debt crises boil over.

America was stripped of its top credit rating on Friday.

Michael Hewson, an analyst at CMC Markets, said he expected markets to plummet again, with further share-price losses of between 10 and 15 per cent possible.

"Sentiment is already feral and there's a lot of fear in the market," he said. "We are in unknown territory."

Italy is the biggest economy to be hit so far in Europe, and EU leaders fear its collapse would destabilise countries throughout the continent.

Buying Italian government bonds would help put a lid on the soaring cost of debt threatening Rome's finances, the ECB hopes.

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Members of the governing council of the ECB, which includes the central bank governors of all 17 eurozone countries, were in a telephone conference last night discussing the terms of the deal, which would see Italian bonds sold on the market from today.

The London stock market fell by almost 10 per cent last week as fearful traders headed for the exit, slashing 150 billion from the UK's top 100 companies. Markets across the world suffered similar pain.

Traders are still worried that Spain and Italy will be unable to pay the interest on their debts and may need bail-outs similar to those handed to Greece, Portugal and Ireland. Fearing market mayhem, Clem Chambers, a leading City figure and chief executive of financial market website ADVFN, said he had sold his entire equities portfolio late last week.

"I did the same before the last credit crunch. The markets are worried that Europe and America are going bust. Not in the way, say, a car company goes bust, but the same underlying thing," he said.

"After the corporate debt fiasco it has rolled into sovereign debt, and countries have unsustainable levels of it. The market nervousness is that it is not just peripheral Mediterranean countries but the likes of America, Spain, Italy."

Not all analysts expect a devastating stock market slump this week,however. David Miller, of Cheviot Asset Management, said: "Markets are unlikely to rise, but a meltdown is not on the cards. Post-2008, many investors have developed their own credit-rating systems and so are less reliant on rating agencies."

Howard Archer, of IHS Global Insight, said: "S&P had indicated that it was likely to happen, so the move should have been largely priced in already by equity markets. But, with sentiment so fragile, it could still fuel further losses."

Meanwhile, Business Secretary Vince Cable has said the UK could fall back into recession.

The stark warning came amid expectations the Bank of England will drastically reduce its growth forecasts this week.

Referring to the financial crisis of 2008, Mr Cable said: "Back then, Britain was at the centre of the hurricane. This time round, we are on the edge of the storm."

Bank of England Governor Sir Mervyn King expected to say that GDP in 2011 is predicted to rise by about 1.3 per cent – significantly down on the 1.8 per cent figure issued in May,

A UK minister admitted Britain would be hit by events in the eurozone but had "limited" ability to influence them.

Foreign minister Alistair Burt said: "Individual countries have got to show they have got

the same sense of commitment to the measures necessary in their countries to reduce their debt and restructure their

economies.

"This is something that does have an effect on us, even though we have been in a different position, largely because of the steps we took when we came into government last year.

"Our ability to influence it is limited. We have to recognise that what happens in other countries is very much a matter for them."

"We'll be carefully watching the evolution of what might happen on Monday."

Prime Minister David Cameron, on holiday in Italy, spoke to French president Nicolas Sarkozy to discuss eurozone

finances and the downgrading of the US credit rating.

No 10 said they agreed in a phone conversation on "the importance of working together".

Chancellor George Osborne, who is also on holiday, spoke to the Jacek Rostowski, finance minister of Poland, which holds the rotating presidency of the EU, and Christine Lagarde, the new head of the International Monetary Fund.

Mr Osborne was also expected to speak to his counterparts from the other G7 countries.

Alarm continues to grow in the US after ratings agency Standard & Poor's stripped it of its AAA credit rating for the first time.

John Chambers, of S&P, said there was a one-in-three chance of a further US rating downgrade over the next six months to two years.