ECB gets pledge, Spain Italy rates down (AP)

Brussels – the European Central Bank's decision to buy billions of dollars worth of bonds in Spanish and Italian, pushed down borrowing costs, the two countries Monday, but analysts warned that the move transfers significant risks on the budgets of an institution long reluctant to go beyond its traditional role to control inflation.

The radical expansion of bond purchase programme of ECB cements the role of the Bank as an institution with primary responsibility for Europe to solve the financial crisis 21 months.

The ECB has been reluctant to become directly involved in averting the crisis instead of push politicians to get the finances of their countries under control and build their own crisis management system.

But a recent spike in investors ' concern for Italy and Spain's high debt levels and lackluster economic growth captured the 17 countries of the eurozone just as parliaments broke for summer recess, delaying the implementation of crucial changes to the bottom of the bailout of Monetary Union.

These changes, once implemented, would allow the European mechanism of financial stability to buy government bonds on the open markets, just as did the ECB.

The French Parliament will not be able to approve the expansion of European rescue first of September, said the Finance Minister of France.

French legislators are scheduled to hold a special session from 6 September to vote on an amendment allowing budget funding for the new aid plan approved by EU leaders on 21 July. Asked if he could be summoned Parliament immediately instead, Francois Baroin said on Europe-1 radio that: "for a democratic process with such heavy stakes, we can go any faster."

With similar votes pending throughout the EU, the ECB decided late Sunday decided to "implement actively" his bond purchase programme, one of its main tools that crisis was not yet used for Italy and Spain.

The Central Bank now plans to buy an average of 2.5 billion euros worth of Spanish and Italian bonds each day, equivalent to 600 billion dollars annually, analysts at the Royal Bank of Scotland wrote in a note.

Bond purchase supports their prices, taking off pressure from broadcasters during an investor sell-off. In early trading Monday, yields, or the interest rate on bonds of Italy fell 0.55 percentage point to 5.45% while the equivalent rate in Spain has fallen 0.71 percentage point to 5.34%.

The ECB could quickly push down the interest rate spread between bonds the two countries and those of Germany — seen as sovereign safer eurozone — 1-1 .5 percentage points, RBS said.

Loans of Italy and Spain Costa rose above 6 percent last week — rates that are deemed unsustainable in the long term for the economies of the third and fourth largest in the eurozone.

But the program will probably have its toll on the interest rate paid by rich nations such as Germany, when they borrow in markets. The ECB's move will not only slow down a recent flight to safety that has kept very low German interest rates, but also transfers credit risk of the Italian and Spanish Governments to the Central Bank and eurozone taxpayers.

Until now, the ECB had invested just under euro80 billion (113 billion dollars) in Greek, Irish and Portuguese bonds.

That appeared to cushion the consequences of Standard & Poors decision Friday feared of downgrading the long-term debt of the United States.

In contrast with the purchase of bonds programs of U.S. Federal Reserve and the Bank of England, the ECB "Sterilize" bond purchases to withdraw funds from the financial system, so that the total amount of money in circulation stays the same and not shoot up inflation.

The ECB's decision to take a more active role came after both in Italy and Spain announced new measures to cut spending and stimulate growth. Italian Premier Silvio Berlusconi said Friday night that his country would work to balance the budget by 2013, one year ahead of schedule.

Spanish Finance Minister Elena Salgado on Sunday announced new reforms to bring in an additional Euro 5 billion to help achieve the goal of cutting its deficit to 6 percent of GDP this year.

He said that half the money will come from changing a system of staggered payment of assessment, so that large companies have to pay at the beginning in the year, although the actual tax rates will not go.

The other half will euro5 billion come from savings in government expenditure by hospital purchases of generic drugs, Salgado told the news agency Efe in an interview. These changes will be approved at a meeting of Cabinet or August 19 or 26.

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Pan Pylas London, Greg Keller, in Paris, Daniel Woolls in Madrid, David McHugh in Frankfurt, Germany, contributed to this article.

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