ECB buys Italian bonds this week

MOSCOW: Italy's austerity reforms go in the right direction and the European Central Bank is willing to support sovereign borrowers as long as it does not put price stability at risk, a senior European central banker told Reuters on Saturday.

Traders said the ECB bought Italian bonds aggressively this week to contain a spike in yields that has pushed financing costs on its sovereign debts of 1.9 trillion euros ($2.6 trillion) above sustainable levels.

Slovenian central bank chief Marko Kranjec, a member of the European Central Bank's governing council, declined to comment in detail on the bond purchases but said they would go "as far as needed".

"We are flexible," he said in an interview on the sidelines of a conference in Moscow. "But we will never forget our primary goal, which is the maintenance of price stability. This has been achieved impeccably.

"We are going to do whatever is needed to assure price stability and to contribute to financial stability but we cannot substitute for fiscal policy."

Kranjec said there was no prospect of the 17-nation euro zone breaking up as a result of the debt strains facing countries like Greece and Italy.

"Reforms are going in the right direction," Kranjec said, when asked about an austerity package due to be voted through on Saturday by the Italian parliament.

Passage of the savings measures will pave the way for Prime Minister Silvio Berlusconi to resign and for the formation of a technocratic government led by former European Commissioner Mario Monti.

"It is difficult to say whether it is enough for the time being but I am optimistic," Kranjec said.

He described the ECB's recent decision to reduce its main policy rate by a quarter points to 1.25 as "consistent with our assessment of the economic situation".

"It showed it (was) appropriate to cut rates. When the situation changes we will reconsider and see what is our job to assure price stability and financial stability."

Copyright Reuters, 2011