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European Central Bank pledges to buy government bonds from Italy and Spain after day of frantic discussions The European Central Bank has moved to halt Europe’s runaway debt crisis by pledging to buy government bonds from Italy and Spain. The move to prop up Europe’s struggling nations came after a day of frantic discussions between the finance ministers of the world’s leading economies. Markets open for the first time since Standard & Poor’s decision to cut the US’s credit rating from AAA late on Friday. In a statement, the ECB said it welcomed announcements by Spain and Italy of “new measures and reforms” aimed at the financial problems and urged both governments to roll them out swiftly. The agreement of the bank’s policy-making governing council is a watershed moment for the ECB. The central bank has so far insisted that the main responsibility for acting lies with national governments. But last week a more modest bond buying effort failed to halt the European slide. The ECB said it had taken note of a statement by France and Germany released on Sunday stressing their commitment to European financial reforms. Silvio Berlusconi’s government cobbled together an emergency austerity package for Italy late on Friday to placate the bond markets. Italy’s borrowing costs shot up last week amid fears that its debts have become unsustainable. Investors were nervously awaiting the opening of the Tokyo Stock Exchange after the announcement, the first test of the move ahead of the opening of European and US markets. In the UK, there are growing fears that the crisis could shatter fragile consumer and business confidence and increase the risk that the already weak economy plunges into a double-dip recession. David Blanchflower, a former member of the Bank of England’s monetary policy committee, said he believes there may have to be a fresh round of emergency measures – including quantitative easing – perhaps as soon as this week. “I would not be the least bit surprised if the Bank of England has to hold an emergency meeting in the next week,” he told the Guardian. “If this carries on, we’re going to see further loans to the banks, further rescues of the banks. This is 2008 all over again.” A Treasury source said: “We have contingency plans in place. We are watching the banks very closely but there is not cause for alarm.” He also stressed that Britain’s financial system is more resilient than during the banking crisis. George Osborne, the chancellor, said the current turmoil showed that Britain’s approach was the right one. “Individual countries need to demonstrate beyond doubt that they have credible plans to deal with excessive deficits, improve competitiveness and strengthen banking systems,” he said in an editorial in the Telegraph. “In this respect, Britain’s experience contains an invaluable lesson for all developed economies: it is possible to earn credibility and get ahead of the markets through decisive action.” Robert Law, managing director, European banks equity research at Nomura, said the problems in the eurozone were more of a concern than those relating to the US downgrade. He said the markets were looking for “permanent solution” to the eurozone rather than just purchases of bonds. “The UK banks are less involved,” he said. But, he noted: “The Italian government bond market is the third largest in the world and the sums involved are potentially very significant. There will be major holdings of Italian bonds in major financial institutions,” he said. In a note analysts at RBS Marketplace welcomed the news saying it would stop the collapse of the bond market in countries under stress and buy “a significant amount of time.” “This policy response is in our view necessary and welcome even if it does not address the underlying weaknesses of the system: high private and or public debt, a lack of fiscal integration, the absence of a euro area wide banking regulator with binding powers,” said RBS. Market turmoil Global economy Economics Stock markets Ratings agencies Financial sector Euro United States Middle East Euro European Union Economic policy Bank of England Dominic Rushe Heather Stewart Jill Treanor guardian.co.uk