Demands for Bond-Buying Agreement Roil European Summit

By Rebecca Christie and Andrew Frye - Jun 29, 2012 7:11 AM GMT+0700

European Union leaders struggled to meet demands by Spain and Italy for relief from rising borrowing costs, threatening to derail a 120 billion-euro ($149 billion) pledge to boost economic growth.

Leaders from the 17 euro nations stayed on to debate the crisis-fighting plan early this morning after all 27 nations informally signed off on the growth strategy. Italy is withholding its final endorsement of the initiative as it pushes for collective action at an EU summit in Brussels to push down its bond yields, said two Italian officials who spoke on the condition that they not be named.

EU President Herman Van Rompuy said talks weren’t gridlocked and will continue through the night and later today.

“We haven’t yet a conclusion on the growth agenda because we have to discuss also the aspects of financial stability and we do this related to the discussion also foreseen” on the future of the euro, Van Rompuy told reporters late yesterday.

Italian officials said they were surprised by his remarks, signaled it sought a broader deal that includes immediate action on lowering borrowing costs. Germany has opposed any effort to join forces on sovereign debt or expand the crisis-fighting role of the European Central Bank.

French President Francois Hollande said Italy and Spain ought to receive support from the euro area’s firewall funds and that their yields are still too high after the efforts they’ve made to reform their economies. Spain’s 10-year yields breached 7 percent and Italy auctioned 10-year securities at the highest yields since December yesterday.

Hollande’s Concern

Hollande said the growth remarks “aren’t enough” and that he’ll withhold endorsement of an EU fiscal pact, which was endorsed by his predecessor, Nicolas Sarkozy in December, at least until the end of the two-day summit.

“The euro zone cannot stay in the current circumstance, without a budgetary union and even more without a banking union,” Hollande told reporters.

Stocks fell in early Asian trading on concern a breakdown in Europe’s crisis-fighting effort may deepen a slowdown in the world’s second-biggest economic bloc. The MSCI Asia Pacific Index slid 0.3 percent at 9:01 a.m. in Tokyo.

Finnish Prime Minister Jyrki Katainen proposed that bailout funds buy collateralized government debt in primary markets. His proposal joined discussion of whether the euro area’s rescue fund should aid banks directly and the role of the ECB, which has already bought more than 200 billion euros of government bonds and pumped more than 1 trillion euros of three-year loans into the banking system. It shelved its bond-purchase program earlier this year.

‘Concrete Measures’

European Union Economic and Monetary Affairs CommissionerOlli Rehn said the ECB’s actions have prevented the crisis from worsening. He also called for “concrete measures” to help Italy and Spain and more debate about mutualized public debt.

“The ECB has played a key role in safeguarding financial stability,” Rehn said in an interview with Bloomberg Television. “We respect the independence of the ECB, but they have played a key role so far in fighting off the crisis.”

To contact the reporters on this story: Rebecca Christie in Brussels at rchristie4@bloomberg.net; Andrew Frye in Brussels at afrye@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net