Italy minister says no pressure on ECB over bonds (Reuters)

CERNOBBIO, Italy (Reuters) – Economy Minister Giulio Tremonti promised on Sunday to meet Italy's budget pledges after growing speculation over whether the European Central Bank may cut back its purchases of Italian government debt.

Tremonti, under mounting pressure to present a credible plan to fulfill a pledge of balancing the budget by 2013 and cutting Italy's 1.9 trillion euro debt pile, told a business conference in the northern town of Cernobbio that the target would be met.

However he admitted that a hastily put-together package of measures presented to parliament in August and now undergoing substantial revision, had been incomplete.

"When you take measures in four days you can make mistakes, it's true," he told a conference discussion.

The regular Ambrosetti conference in Cernobbio near Milan this weekend has brought growing doubts about the 45.5 billion euro austerity package to a head following a week of rising market pressure on Italian government bonds.

Both ECB President Jean-Claude Trichet and Italy's head of state, President Giorgio Napolitano issued strong calls for swift action following widespread criticism of the haphazard way in which the plan was being handled.

Marco Tronchetti Provera, chairman of tyremaker Pirelli, one of the icons of Italian industry, said Tremonti's speech to the conference had been clear but it had not eliminated doubts about the gravity of the situation.

"I repeat that anyone who is not concerned about this situation is making a mistake," he told reporters.

The head of Confindustria, Italy's largest employer federation also took aim at the government during the conference, saying the plans presented so far did not do nearly enough to stimulate the country's anaemic growth rates.

Underlining the growing concerns, the premium investors demand to hold Italian debt rather than benchmark German bonds rose on Friday to 331 basis points, the highest since the ECB started buying Italian paper in August.

Yields on 10-year Italian bonds ended the week at 5.29 percent, creeping back up toward the 7 percent level generally regarded as unmanageable.

ECB INTERVENTION

With the spreads over German debt widening ominously, there was growing speculation over whether the ECB would continue buying Italian debt, a strategy that has caused sharp divisions within the Frankfurt-based central bank.

The ECB has been buying Italy's bonds in the market to try to hold down yields and stop Rome's borrowing costs spiralling out of control, there has been a growing sense of frustration that the government has not done enough itself.

"Our biggest concern is that the ECB might halt its purchases of Italian bonds, which would cause spreads to widen again," the head of Confindustria, Emma Marcegaglia, told reporters. "In this case, Italy would have huge problems."

On Saturday, Trichet declined to comment on the bond buying programme ahead of a Governing Council meeting on Thursday.

Italy, the euro zone's third largest economy, has been dragged ever closer to an emergency that could overwhelm any existing euro zone bailout mechanisms. But there have been worries in Germany that the ECB is blurring the lines between monetary policy and governments' own fiscal responsibilities.

Italy's Foreign Minister Franco Frattini, who said on Saturday that the government was pressing the ECB to keep up the purchases, backtracked on Sunday, saying the central bank was independent and Rome was not exerting pressure.

Tremonti offered no substantial new pledges on the timing or substance of the austerity package, which has been subject of repeated changes and dispute over the past weeks.

However he repeated his longstanding call for jointly issued euro bonds, which have been rejected by Germany.

"The euro bonds will absolutely be done," he said. "Either we do euro bonds or we will have critical problems," he said.

Frattini told reporters the Senate would approve the new package by the end of next week and that approval from the Lower House would follow swiftly.

"I don't see any reason why the government should ask for a confidence vote on the budget," he added.

(Writing by James Mackenzie, editing by Rosalind Russell)

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Belgium adds to call for euro bonds, bigger bailout (Reuters)

VIENNA/BRUSSELS (Reuters) – Pressure on Germany and France to take radical action on the euro zone debt crisis mounted on Friday, as financial markets sagged further and Belgium added its support to calls for the region to issue debt jointly.

Belgian Finance Minister Didier Reynders said the bloc should issue common euro bonds and expand its bailout fund to calm repeated market selloffs of government bonds and bank shares of vulnerable debtor countries.

Germany has led resistance to both proposals. Belgium's support for bonds promoted by high-debt nations such as Italy and backed by some European Commission officials will not necessarily tip the balance.

But Reynders' call in the Financial Times for the euro zone had to prove it had "deep pockets" underlined increasing fears among euro zone governments that they would be unable to reassure investors that euro zone banks are safe without drastic action by the 17-nation bloc.

Merkel repeated her criticism of proposals for euro zone bonds, telling a rally of her Christian Democrats this was a "slippery slope" that would probably leave everyone worse off.

"Euro bonds would not allow any rights at all to intervene to force discipline on others," she said.

French Prime Minister backed her view, writing in an editorial published in daily Le Figaro that common euro zone bonds without further fiscal consolidation could threaten France's triple-A credit rating.

Bickering over the latest Greek bailout and lingering disappointment over Wednesday's Franco-German summit helped drag European shares to near two-year lows on Friday.

Fears that major world economies are heading for recession are adding to worries that euro zone banks face short-term funding troubles, losses from sovereign debt and weak trading income.

Greece, at the center of the euro zone debt storm, also announced its economy would shrink by more than previously thought -- by 4.5 percent this year against an earlier estimate of 3.8 to 3.9 percent.

"The best way to resolve a debt crisis is to grow out of it so a recession certainly would not help. I think the confidence element is very important now," said ING economist Martin van Vliet. "It's time to break the downward spiral of a self-fulfilling recession. We are in that stage right now."

Spain's announcement of further austerity measures and a move to support its stricken housing market, aimed at showing it was working hard to stay out of the debt crisis, had little market impact.

BAILOUT SQUABBLE

Market impatience with the pace and complications of euro decision-making has been heightened by a rush by smaller euro economies to demand collateral from Greece in return for contributing to its bailout fund, and Austria sought on Friday to resolve that dispute.

The collateral demand, first made by Finland, has ruptured the common line found at the July 21 summit, particularly after Austria, the Netherlands and Slovakia said on Thursday they deserved the same treatment.

Dutch finance minister Jan Kees de Jager described as "very complicated" Austria's proposal that more collateral should be available to countries whose banks and insurers were less exposed to Greece.

Marco Valli, chief eurozone economist at UniCredit, said that Europe needed more than ever to be speaking with one voice.

"If you want to sell your pact to save Greece then you should not be fighting about this. It undermines the credibility of the package," he said.

For markets though, the issue of collateral may be more of a sideshow compared with the debate on additional support for the zone.

Germany, the euro zone's chief paymaster, has repeatedly opposed a big increase in the bailout fund and says that common euro zone bonds would remove incentives for fiscal prudence, rewarding profligate nations.

European Central Bank heavyweight Juergen Stark described jointly issued bonds on Friday as a "false solution."

Even so, BNP Paribas Chief Eurozone Market Economist Ken Wattret said he believed euro zone leaders would ultimately agree to launch common bonds and to increase the bailout fund.

"It would be helpful for markets if the EFSF were increased now, but the political reality is that this is unlikely to happen until at least later in the year," he said.

(Additional reporting by Sara Webb in Amsterdam, Stephen Mangan in London, Petra Wischgoll in Hameln, Germany, Marc Angrand, Nicholas Vinocur in Paris)

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Markets look to Fed after ECB buys bonds (Reuters)

WASHINGTON/LONDON (Reuters) – Investors are looking to a meeting of the Federal Reserve on Tuesday for signs of further support for reeling financial markets and the economy after the European Central Bank stepped in to buy Italian and Spanish government bonds in the latest attempt to deal with the euro zone debt crisis.

Over the weekend the G7 and G20 group finance ministers pledged coordinated action to ensure financial market stability and economic growth after world stock markets lost $3.4 trillion in value since July 29 on investor concern that slowing global economic growth would make it even harder for heavily indebted countries to pay their debts.

Late Friday the United States lost its prized AAA credit rating from Standard and Poor's, reflecting the agency's fear that political gridlock in Washington, D.C would prevent the government from cutting its budget deficit and reducing its debt.

U.S. President Barack Obama on Monday said he hoped Friday's credit rating downgrade will give Congress a new sense of urgency to tackle the government's budget deficit.

Stock markets around the world fell further on Monday and investors rushed into safe-haven assets like U.S. Treasury debt, despite the U.S. rating downgrade, as well as gold. Gold soared to almost $1,720 an ounce in its biggest surge since March 2009. Major U.S. stock market indices were down about 5.0 percent by mid-afternoon after European stocks fell to a two-year low.

"The sell-off is mainly due to the fear that we will relapse into recession," said Klaus Wiener, chief economist at Generali Investments, which manages 330 billion euros ($468 billion). "Many investors have finally realized that the U.S. economy will not grow at 3.0 percent."

ECB TO THE RESCUE

In Europe, traders estimated the ECB bought about 2 billion euros in Italian and Spanish debt after it agreed on Sunday to broaden its controversial bond-buying program for the first time to include the bloc's third- and fourth-biggest economies.

After a rare Sunday night conference call, the ECB welcomed announcements by Italy and Spain of new deficit-cutting measures and economic reforms as well as a Franco-German pledge that the euro zone's rescue fund will take responsibility for bond-buying once it is operational, probably in October.

"It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program," ECB President Jean-Claude Trichet said in a statement.

The central bank action aimed to change the dynamics on bond markets that had been pushing Italian and Spanish borrowing costs up toward unsustainable levels since mid-July.

Since the program began in May last year it has bought just 76 billion euros of bonds, while Italy and Spain alone issue around 600 billion a year.

"The intervention by the European Central Bank this morning seems to have been working," Irish Finance Minister Michael Noonan told RTE public radio.

"Last week the risk was that as bond rates in Italy went toward 7.0 percent, they'd be driven into some kind of bailout program. They have fallen by almost one percent this morning so they are well out of the bailout territory now."

Spreads of Italian and Spanish bonds over German debt narrowed sharply and the cost of insuring peripheral European debt against default fell. But French sovereign credit default swaps hit a record high of 160 basis points as the U.S. rating downgrade raised questions about how long other AAA countries, such as France, could hold onto their top-notch ratings.

The ECB move was seen as only a temporary solution however, due to the sheer size of Italy's bond market -- $1.6 trillion.

Longer term, more profound measures need to be taken or some of the euro zone risks breaking up, some analysts said.

"They can keep it up for some weeks but I don't think it can have a lasting impact on the market," said Glenn Marci, interest rate strategist at DZ Bank.

However, European stocks sank to their lowest in nearly two years on Monday as doubt about governments' ability to deal with the euro zone debt crisis and its impact on economic growth emerged.

Berlin denied that Germany and France had made any stronger promises about the euro zone rescue fund's commitment to buy bonds of weak member states in the secondary market, after the ECB singled out that pledge.

A bailout of Italy would overwhelm the EFSF's existing resources. Germany has so far opposed expanding it but French Finance Minister Francois Baroin said: "The allotment is 440 billion and we've already said if we need to go further we will go further."

Over the weekend the Group of Seven major industrial nations -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said they would take joint action if needed in foreign exchange markets because "disorderly movements ... have adverse effects for economic and financial stability."

A G20 communique along similar lines followed shortly after European markets opened.

The Japanese intervened to restrain their surging currency last week while the Swiss National Bank surprised with a new round of easing as it fought a rapidly rising franc.

FED AHEAD

Investors are now turning their attention to what the Federal Reserve might say at its policy meeting on Tuesday.

Although the Fed's meeting is not expected to produce any immediate change in policy, pressure is now growing on the Fed to try further monetary easing -- dubbed QE3 by the market.

The U.S. central bank completed a second installment of bond buying, or quantitative easing, worth $600 billion on June 30 and the Fed is reinvesting its portfolio as it matures.

"We are probably a little bit closer. But I don't think we're there yet," said Nomura's chief global economist Paul Sheard. "I think the Fed would have to get a little bit more concerned that financial markets were spinning out of control before accepting ... QE3."

(Additional reporting by Laura MacInnis, David Lawder and Mark Felsenthal in Washington, Sarah Marsh and Noah Barkin in Berlin, and Gerard Bon and Paul Taylor in Paris; Editing by Mike Peacock and Clive McKeef)

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