France and Italy pile more pressure on ECB

France and Italy yesterday piled more pressure on the ECB to agree steps this week to reduce crippling borrowing costs for southern eurozone states.

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

Italian prime minister Mario Monti and French President François Hollande said after talks in Rome that European institutions must act to bring down the bond yields of countries that are unjustifiably penalised 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 markets were charging at end-August.

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 co

“Draghi certainly has to present something,” said Guillaume Menuet, economist at Citi. “A document of some sort, something of substance is what markets want to see in order to justify valuations.”

Spanish and Italian government bond yields fell yesterday as investors welcomed leaked comments Draghi made behind closed doors in the European Parliament on Monday, suggesting the ECB could buy bonds with a maturity of up to three years — at the long end of market expectations.

ECB executive board member Jörg Asmussen, the most senior German at the bank said: “The markets are pricing in a break-up of the eurozone. For a currency union, such systemic doubts are not acceptable.”

— Reuters