ECB bond-buying campaign misses Italy, Spain

Traders say Thursday’s worldwide stock market selloff was sparked when the European Central Bank made purchases in the government bond market.

The good news was that the ECB bought government bonds for the first time since March. The bad news was that the bonds it bought were from Ireland and Portugal, two countries that have already cut their budgets and restructured their debts.

As a result, interest rates in Italy and Spain — which are both struggling with debts running more than half of GDP — rose to within a sliver of their highs since the euro was implemented.

Today, Spanish 10-year bond rates fell to 5.97%, while Italy — the world’s No. 3 bond market — is still being forced to offer investors more than 6.1% in interest to attract funds.

Investors are reluctant to jump in to the Spanish and Italian markets where the ECB fears to tread. As Italian Finance Minister Giulio Tremonti summed up, “If your central bank doesn’t buy your bonds, why should we buy them?”

ECB President Claude Trichet is walking a difficult path between teetering economies on one side, and the reluctance of Germany’s Bundesbank to bail out countries they see taking insufficient steps to reform their economies.

The other impediment is that the European Financial Stability Facility, agreed to earlier this year and designed to allow the bank to step in to markets when needed, remains unfinished.

“I would encourage everyone to remain calm, breathe deeply, and look to the economic fundamentals,” Olli Rehn, EU Commissioner, told reporters.

Unfortunately, the numbers are not great. Italian GDP rose 0.3% in the second quarter, compared with 0.1% in the first quarter, national statistics institute Istat said today.

In Spain, GDP rose 0.2% in the second quarter, compared with 0.3% in the first quarter, the Bank of Spain estimated today. Industrial output fell in June in both countries and in Germany, separate reports showed.

Meanwhile, stocks around the world continued the losses. Markets in Asia shed between 3% and 5% of their value, while European markets fell as much as 2.7% and U.S. indices declined up to 2%.

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