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Saturday, November 05, 2011 6:49 PM

ECB Threatens to Halt Italian Bond Purchases; Italy Prime Minister Pressured to Resign; Bond Buyer's Strike Coming Up?

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In yet another attempt to pressure prime minister Silvio Berlusconi into promised reforms ECB debates ending Italy bond buys.

The European Central Bank often discusses the possibility ending the purchase of Italian government bonds if it concludes Italy is not adopting promised reforms, ECB Governing Council Member Yves Mersch said.

"If we observe that our interventions are undermined by a lack of efforts by national governments then we have to pose ourselves the problem of the incentive effect," Mersch said according to extracts of an interview with Italian daily La Stampa to be published on Sunday.

Asked if this meant the ECB would stop buying Italy's bonds if it did not adopt reforms it has promised to the European Union, Mersch, who heads Luxembourg's central bank, replied:

"If the ECB board reaches the conclusion that the conditions that led it to take a decision no longer exist, it is free to change that decision at any moment. We discuss this all the time."

Mersch said the ECB did not want to become a lender of last resort to help the euro zone solve its debt crisis and said it was concerned that its job could be made more difficult by governments that "don't meet their responsibilities."

"Our job is not to remedy the errors of politicians," he said.
For starters, the ECB is already the lender of last resort. Moreover, one look at Portugal and Italy suggests the ECB is not having the intended effect.

"Our job is not to remedy the errors of politicians" said Mersch. How true, if only they would practice what they preach. By the way, whose job is it to remedy the errors of central banks?

Finally, does anyone find the ECB's bond threat credible? I don't.

Italy Prime Minister Pressured to Quit

Every other week or so, someone puts pressure on scandal ridden Silvio Berlusconi to resign.

Pressure rose on Italy's besieged Prime Minister Silvio Berlusconi to quit on Thursday, as rebel deputies from his own centre-right party threatened to oppose the government in a vital parliamentary vote next week.

Six former parliamentary loyalists wrote to Berlusconi calling for a new government in a letter published in the daily Corriere della Sera.

"Be the backer of a new political phase and a new government," the deputies wrote.

One of the deputies, Isabella Bertolini, said the rebels could oppose Berlusconi in a parliamentary vote next Tuesday to sign off the 2010 budget.

"We are convinced that a strong political signal will come, otherwise we will see how we will act," she told reporters.

The vote could bring more rebels from the ruling PDL party out into the open, she added, if the 75-year-old premier does not change course.

Berlusconi has repeatedly rejected calls to stand aside and make way for an interim government, saying the only alternative would be to hold early elections next spring, a step he says would be irresponsible while the crisis continues.

A government source told Reuters Berlusconi had informed his European partners at a G20 summit in Cannes on Thursday he would call a confidence vote within 15 days on new measures to face the economic crisis.

Yields on 10-year BTP bonds hit more than 6.3 percent, creeping closer to the level of 7 percent which many analysts believe could lead to a so-called "buyers' strike" where investors take fright and refuse to buy the paper.
Bond Buyer's Strike Coming Up?

Reuters has the buyers strike idea backwards. It's a buyer's strike that pushes yields higher as opposed to a buyer's strike kicking in at some magic number.

Mike "Mish" Shedlock
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