BRUSSELS — European officials wrestled over whether to commit more money to help stabilize the euro as the European Central Bank revealed it has stepped up purchases of government bonds in an attempt to restore confidence in the EU's single currency bloc.
Finance ministers gathered Monday in Brussels to find ways to fight the debt crisis that has rocked the currency bloc, while the European Central Bank said it splashed out €1.965 billion ($2.57 billion) buying government bonds in the week leading up to Tuesday. That was up from €1.345 billion the week before and the highest weekly amount in months.
Next week's figures will be key as they will contain purchases by the bank last Friday, Dec. 2, when it held its monthly policy meeting.
Market participants suspect the stabilization in European bond markets since the meeting has been largely due to even more purchases by the central bank, under pressure from policymakers to do more to prevent Europe's debt crisis from spreading to Portugal, and more dangerously to much larger Spain, following earlier bailouts of Greece and Ireland.
In total, the ECB has bought €69 billion worth of government bonds since May, when it was given the right to do so following the bailout of Greece. Buying bonds supports their prices, taking pressure off the banks that hold them. It also lowers bond yields, which indicate the borrowing costs countries would face were they to go into the market for more credit.
Though the pressures on Europe's highly indebted countries has waned somewhat over the past few days, Europe's debt difficulties remain.
"Last week's bond buying by the ECB was a short-term panacea but it does not resolve the underlying problems," said Neil MacKinnon, global macro strategist at VTB Capital.
A proposal Monday for the creation of pan-European bonds by the head of the so-called eurogroup, Jean-Claude Juncker and Italian Finance Minister Giulio Tremonti sparked speculation on how far eurozone governments would go to shore up confidence in the currency as well as their public finances.
Additionally, some officials want to put up more money, while Germany says the current, €750 billion ($1 trillion) bailout fund is enough.
European finance ministers have to figure out how to fund a new crisis tool that is supposed to support countries that run into financial trouble after 2013, when the current fund's madate expires. Greece and Ireland have already been bailed out after high borrowing costs shut them out of the bond market, and many fear Portugal or Spain could follow.
Crucially, this so-called European Stability Mechanism will force private creditors to share the pain if a nation is deemed insolvent — that is, if its debts are too big to repay. However, if a government merely faces a liquidity crisis — it can't access funds fast enough to meet payment deadlines — it is supposed to get rescue loans from the new mechanism.
The ministers agreed on the broad outlines of the new mechanism late last month, but didn't say where the money for the emergency loans would come from.
The threat of potential losses for private bondholders like banks and hedge funds, which were spared in this year's bailouts, has spooked government debt markets in recent weeks and reopened debate on whether the existing bailout fund will big enough in case large economies like Spain or Italy run out of money.
Belgian Finance Minister Didier Reynders said over the weekend that eurozone countries should increase the existing fund now and not wait until the new stability mechanism has been set up. On Monday, he said the size of the current fund would be on the table at the finance ministers meeting.
"First we have to discuss how to set up the permanent mechanism and based of that we'll see if there are changes to the provisional mechanism," he said.
In an editorial in the Financial Times, Juncker and Tremonti wrote the European Union should issue its own bonds to fund emergency loans to countries that run into trouble after 2013.
A European Debt Agency could eventually issue bonds worth up to 40 percent of EU economic output, Juncker and Tremonti wrote. The agency should finance 50 percent of all bonds sold by EU states and — in cases where debt markets seize up like they have in recent weeks for countries like Ireland and Portugal — it could fund the entire bond issue, the two officials wrote.
However, Germany quickly rejected the idea of European bonds. Chancellor Angela Merkel said such bonds were legally impossible under the current EU treaties.
"It is our firm conviction that the treaties do not allow joint eurobonds, that is no universal interest rate for all European member states," she told journalists in Berlin.
Germany, because of its strong economy pays much lower interest rates on its bonds than weaker eurozone nations like Ireland, Portugal or Italy. The interest rate on pan-European bonds would likely be higher than what Germany is paying at the moment, because it would price in the risk of default of poorer governments.
Merkel also said that at the moment she didn't see a need to boost the existing bailout fund.
Interest rates on debt issued by Portugal, Spain and Italy stabilized last week, after Jean-Claude Trichet, the head of the European Central Bank, hinted that the Frankfurt-based bank might step up its government bond purchases.
Investors fear that the debt load in fiscally weak countries, particularly Portugal but also Spain and Italy, could require more rescue efforts.Comment on this story
Mere government guarantees like the ones that hold up the current bailout fund wouldn't be enough, said Gilles Moec, an analyst at Deutsche Bank in London. "It will be about creating a regular flow of permanent funding to this facility."
Money could come from a pan-European tax or special bonds issued for the entire eurozone, experts say.
Others see an even stronger role for the new facility.
"It should be able to do just about anything, including buying up government bonds," said Stefano Micossi, director general of Italian business association and think tank Assonime. The new mechanism should get unlimited access to central bank credit to stabilize bond prices, said Micossi. "One trillion, 2 trillion, you name it."
Juergen Baetz in Berlin contributed to this report.