European Central Bank backs Italy, Spain in bid to halt euro crisis

The European Central Bank intervened dramatically in bond markets today, backing up a verbal pledge to support Spain and Italy with action in an attempt to avert a financial meltdown in the euro zone.

Significant ECB bond-buying – the only practical result of a weekend of frantic G7 and G20 crisis diplomacy – forced down Italian and Spanish borrowing costs in an initial reaction.

But stock markets fell across the globe as investors rattled by a historic downgrade of the United States' credit rating piled out of shares and into safe haven assets such as gold and German bonds.

Traders said the ECB had bought some 700 million euros in Italian and Spanish debt, after it agreed on Sunday to broaden its controversial bond-buying programme for the first time to include the bloc's third- and fourth-biggest economies.

European politicians voiced relief that the market turmoil was not worse. British Deputy Prime Minister Nick Clegg said it was promising that statements from the French and German leaders, the ECB and finance ministers, had had "some effect at placating the markets and calming the markets" but governments had much to do restore their public finances.

After a rare Sunday night conference call, the ECB welcomed announcements by Italy and Spain of new deficit cutting measures and economic reforms as well as a Franco-German pledge that the euro zone's rescue fund will take responsibility for bond-buying once it is operational, probably in October. "It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme," ECB President Jean-Claude Trichet said in a statement.

Since the programme began in May last year it has bought just 76 billion euros of bonds, while Italy and Spain alone issue around 600 billion a year.