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ECB steps up bond buys to (EURO)9.5 billion
Associated Press
2011-11-07 10:30 PM
The European Central Bank stepped up its purchases of government bonds last week to (EURO)9.5 billion ($13 billion), bank figures showed Monday.

The purchases are aimed at keeping a lid on borrowing costs faced by Italy and Spain so they don't succumb to the European debt crisis as Greece has. Last week's total was up from (EURO)4.0 billion the week before.

Despite the purchases Italian bond yields rose last week as investors questioned whether the government there will reform its finances and economy. On Monday they climbed as high as 6.68 percent for the 10-year bond, the highest rate since Italy joined the euro in 1999.

When the ECB re-launched bond buys in August it drove the yield down to just below 5 percent from over 6 percent.

Mario Draghi, the new man at the helm of the European Central Bank, warned governments last week that it was "pointless" to depend on the bond buys to keep their borrowing costs down for any length of time. He said they needed to reform their economies and get spending under control in order to convince bond markets to lend at reasonable rates.

Nonetheless some economists say the ECB may wind up having to buy large amounts of Italian bonds. That is because an Italian default would have serious consequences for the eurozone and the global economy, and only the ECB has the financial firepower to conduct a rescue.

The bank wants the European bailout fund, the European Financial Stability Facility, to take over the job of supporting indebted governments.

But it is considered too small for the job, with financial resources of (EURO)440 billion ($605 billion) and much of that already committed to bailouts for Greece, Portugal and Ireland. Eurozone finance ministers will talk later Monday about how to extend its financial firepower.

European officials have also proposed using a special-purpose entity along with the EFSF to raise money from outside investors.

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