Pressure mounts on ECB to bring down bond yields

Tue Sep 4, 2012 11:49am EDT
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By Gavin Jones and Sakari Suoninen

ROME/FRANKFURT (Reuters) - France and Italy piled more pressure on the European Central Bank on Tuesday to agree steps this week to reduce crippling borrowing costs for southern euro zone states.

But the bank is expected to outline rather than detail its strategy on Thursday in order to keep the pressure on politicians to bring their deficits and debts under control.

Italian Prime Minister Mario Monti and French President Francois Hollande said after talks in Rome that European institutions must act to bring down the bond yields of countries that are unjustifiably penalized by markets.

Monti said he expected measures to remove "the serious obstacle of (bond) spreads that have no underlying economic justification" for Italy and other countries "doing our homework" on economic reform and deficit reduction.

The Bank of Italy said in a study that economic fundamentals justified a risk premium of 200 basis points - or two percentage points - over benchmark German bonds, rather than the 450 basis points that markets were charging at end-August.

Hollande said high debt yields facing countries such as Spain and Italy were not justified and it was the role of EU institutions, including the ECB, to bring them down.

ECB President Mario Draghi will try to back up his pledge to do "whatever it takes" to save the euro when he presents some details on Thursday of a new bond-buying plan that is transfixing markets hopeful it can ease the euro zone crisis.

Investors are on tenterhooks after brinkmanship in the ECB's internal negotiations over the plan was played out in public last week, with one newspaper reporting that Bundesbank chief Jens Weidmann even considered quitting.   Continued...

European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt August 2, 2012. REUTERS/Alex Domanski