ECB halves bond buys despite crisis

The European Central Bank halved its purchases of government bonds last week despite alarm bells ringing loudly in the euro zone as Italy's borrowing costs hit unsustainable levels.

Last week's purchases of €4.478 billion were less than half the previous week's, when the ECB spent €9.52 billion, the most since mid-September. The overall total of the programme rose to €187 billion.

Last week's purchases came in well below analysts' expectations of €10 billion.

The decline in spending came in the first full week of Mario Draghi's leadership at the bank after he took over from Jean-Claude Trichet, and as the ECB continues to publicly resist political pressure - including from the United States, Britain and Russia - to step up the purchases to better shield Italy,Spain and other debt-strained euro states.

Bundesbank president Jens Weidmann said today international pressure for the ECB to play a bigger role in tackling the euro zone debt crisis must end as it could undermine the central bank's hard-won credibility.

Mr Draghi, in his first news conference as ECB president earlier this month, offered no commitment to scale up the bank's bond-buying, instead describing it as "limited".

Juxtaposing Draghi's deliberately guarded words at the ECB news conference, traders say the ECB has been steadily buying Italian and Spanish bonds since he took over as president.

The interventions have failed to cap a steady climb in borrowing costs, however.

Italy paid a record 6.29 percent yield to sell five-year bonds today in the first auction held after former European commissioner Mario Monti was asked to head an emergency government charged with tackling the debt crisis.

Italy last week saw bond yields soar past the 7 per cent level that has triggered international bailouts of Ireland and Portugal. At the worst of last week's market turmoil, it had peaked at about 7.8 per cent.

The ECB reactivated its bond-buying - known as the Securities Markets Programme - in August after a four month break as the crisis moved to Italy and Spain, two of the euro zone's biggest economies. It was first started in May 2010.

Under the programme, the ECB and the 17 euro zone national central banks can buy government and corporate bonds from banks and other investors, but not directly from governments. It is designed to keep bond markets in check and ensure the full benefit of the ECB's low interest rates are felt across the 17-country group.