ECB to keep up bond-buying until EFSF 'vacuum' filled

LUXEMBOURG: The European Central Bank (ECB) will keep buying Italian, Spanish and other stressed eurozone government bonds until a new financial rescue system is ready to take over, a top official said Thursday.

"As soon as the European Financial Stability Facility receives the means it has been promised, then there will be no reason for the ECB to be in the market," Central Bank of Luxembourg governor Yves Mersch said in an interview released by his office to be published in Friday's Wall Street Journal.

"We are in a short-term implementation vacuum," he said of the wait for a deal reached by eurozone leaders at a July 21 emergency summit to be enacted.

Governments of the 17-nation single currency area are trying to speed up ratification of the deal to make changes to the 440-billion-euro ($625-billion) EFSF, a rescue fund set up after a first Greek bailout in 2010 that has since provided emergency loans to Ireland and Portugal.

The fund is to contribute to a second Greek bailout of around 160 billion euros, and take over bond-buying on secondary markets with new powers enabling it to step in before crises build up on commercial money markets.

In exchange for buying Italian and Spanish bonds, which is moderating costs of borrowing rapidly rising to unsustainable levels, the ECB has demanded radical reforms be accelerated by Rome and Madrid.

Some central bankers argued it provided debt-laden governments with no real incentive to slash spending and enact reforms.

Mersch also said it would be best if the EFSF was fully functioning before Italy's Mario Draghi takes over at the ECB's helm at the start of November.

"I think that the incoming ECB president ought not to be in the same mode as the present one," Mersch added of French incumbent Jean-Claude Trichet.

But the timetable for ratification stretches from a pledge for an emergency decree in Italy to a vote in hardline Slovakia's parliament that might not take place until the end of the year.

Eurozone finance ministers are next due to meet officially September 16 and 17 in Poland, although many have suggested meeting earlier.

"I think what the ECB has done in terms of its main mandate, in terms of price stability, is still the most important contribution to market stability in times of stress," Mersch added.

Copyright AFP (Agence France-Presse), 2011