Europe's central bank spent most ever on bonds

The European Central Bank revealed Monday that it splashed out 22 billion euros ($31 billion Cdn.) last week — more than it has ever done before — propping up the bond markets of Italy and Spain.

News of the big bond purchases came a day before the leaders of Germany and France meet to discuss the debt crisis that has engulfed Europe for over a year and a half.

Speculation that German Chancellor Angela Merkel and French President Nicolas Sarkozy would be considering proposals for the euro zone to issue jointly guaranteed government debt appear to have been dashed, though.

Tuesday's meeting in Paris comes after a week or two of turmoil in financial markets, which was partly blamed on Europe's sprawling government debt crisis, which threatened to engulf economic heavyweights such as Italy and Spain.

Fears that the euro zone's third and fourth largest economies may find it too expensive to service their debts triggered the ECB's intervention in the bond markets.

France, itself, was caught in the crossfire last week, with investors worrying about the financial health of the country's banks in particular and whether the country would be the next country after the U.S. to lose its triple-A credit rating.

France and Germany, which together account for almost half of the euro zone's economic output, are once more taking the centre stage in pushing for reforms aimed at pulling the bloc out of its debt crisis.

"That is and remains a path of consolidation, of reform, strict adherence to a reworked stability pact that also includes sanctions," Merkel's spokesman Steffen Seibert said.

The discussions will centre on "measures for better agreement of financial policies," paving the way for enhanced economic governance, he added.

Eurobonds not on agenda

Officials for both Merkel and Sarkozy said Monday that jointly guaranteed eurobonds would not be on the agenda.

Eurobonds would be a major step toward the bloc's economic integration, and are billed by supporters as an overnight solution to the crisis. Italy, Greece, Belgium and Luxembourg are among the nations calling for eurobonds.

However, Germany has been adamantly against their creation.

Finance Minister Wolfgang Schaeuble reiterated his opposition when he told German news magazine Der Spiegel that eurobonds were out of the question as long as the currency zone's 17 nations still run their own budget policy.

Different interest rates for euro zonenations, he added, were needed to provide "incentives and the possibility of sanctions to enforce solid financial policy."

Schaeuble acknowledged that the EU must, and will, beef up its response to the crisis to assist the heavily indebted nations, but that "there won't be a collectivization of debt or unlimited assistance."

Merkel has long ruled out eurobonds, and Economy Minister Philipp Roesler joined the chorus Monday, describing jointly guaranteed debt as "the wrong way" out of the crisis.

"Eurobonds would mean that everybody shares the same interest burden which would be a punishment for (financially) sound nations," he was quoted as saying by German news agency dapd.

"We cannot want this for Germany and for all other good states."

 With Europe still scrambling to come up with measures that appease the markets, the European Central Bank has been taking a more central in dealing with the crisis, that has already seen Greece, Ireland and Portugal bailed out.

Analysts think a large chunk, if not all, of the 22 billion euros  spent last week was used to prop up the bond prices of Italy and Spain, who had seen their borrowing costs ratchet up sharply in the preceding weeks.

The ECB's purchases were the biggest weekly amount the bank has made under the emergency  measure, exceeding the 16.5 billion euros it laid out when it started buying Greek government debt in May, 2010.

While stocks took a pounding last week, the program boosted Italian and Spanish bonds, pushing their prices up and interest yields — which move in the opposite direction — down.

High bond yields were what drove Ireland, Portugal and Greece to seek bailouts from the European Union and the International Monetary Fund.

The bank is temporarily shouldering the burden of fighting the crisis until national parliaments approve new powers for the European Union's bailout so it can buy government bonds or help recapitalize banks if necessary.