Aug. 4 - The European Central Bank acted to try and calm euro zone markets and help Spain and Italy by announcing new steps to keep banks supplied with unlimited, longer-term funds and by signalling it was buying government bonds. Joanna Partridge reports.
All eyes were on Spain as it faced the latest test of the euro zone debt crisis. Madrid was easily able to sell 3.3 billion euros of bonds, even though the markets are currently turbulent. But the country was forced to a pay a higher rate of interest says Javier Ferrer from brokers Ahorro Corporacion. SOUNDBITE: HEAD OF PUBLIC DEBT AT AHORRO CORPORACION, JAVIER FERRER, SAYING (English): "It is a fantastic yield for the Spanish investors in general, because the Spanish people invest, normally, in the maturity of three years. We think it is very important for the Spanish economy or the Spanish situation this auction." Spanish and Italian bond yields came down from 14-year highs after the auction, which should slightly calm investors' nerves. They were worried unsustainable bond yields could drag Madrid and Rome, respectively the euro zone's third and fourth-largest economies, into a Greek-style debt crisis. Italian Prime Minister Silvio Berlusconi has told Italians he doesn't think the crisis will get any worse and has promised a comprehensive reform pact with unions and employers by September. Investors also had some hopes answered when the European Central Bank moved to calm euro zone markets at its monthly meeting. The ECB kept interest rates on hold at 1.5%, and President Jean-Claude Trichet said their government bond purchase programme - which had been inactive since March - was ongoing. In addition, the ECB will also provide banks with unlimited short-term funds at least until next January. SOUNDBITE: Jean-Claude Trichet, European Central Bank President, saying (English): "A liquidity providing supplementary longer-term refinancing operation, LTRO, with a maturity of approximately six months." Spain and Italy are dependent on ECB funds - and many banks in Greece, Portugal and Ireland are still totally shut out of market funding. While the ECB's actions are welcome, they may not be enough to completely convince investors the debt crisis is under control. The European Commission is also urging euro zone leaders to consider increasing the size of their financial rescue fund, in case economies like Italy and Spain, seen as "too big to fail", do indeed end up needing bailouts. Joanna Partridge, Reuters