The European Central Bank signaled on Saturday it would not abruptly end its bond-buying program now that the euro zone bailout fund EFSF has powers of secondary market intervention and would wait until financial markets stabilize.
The European Financial Stability Facility now has the power to buy bonds of distressed euro zone sovereigns to underpin their prices -- a job the ECB has so far been doing to prevent Italy and Spain from running into financing difficulties.
ECB President Jean-Claude Trichet told a news conference at a G20 finance chiefs' summit that the bank's bond buying was designed to tackle disruption of markets and was implemented to improve the transmission of ECB monetary policy.
It is because we have the absence of financial stability in the euro area that we have to intervene to help restore a better transmission of monetary policy, Trichet said.
The working assumption is that when we have -- thanks to the new flexible EFSF -- financial stability, we do not have to help restore better transmission of monetary policy, he said.
The ECB had to buy Spanish and Italian bonds over the last two months to keep financing costs for the two countries at sustainable levels and prevent Madrid and Rome from being shut out off from markets like Greece, Ireland and Portugal, in what euro zone policymakers call containing contagion.
EU Economic and Monetary Affairs Commissioner Olli Rehn, said the new powers for the EFSF, which also include extending precautionary credit to governments and lending for bank recapitalization, as well as the fund's planned higher firepower through leveraging and an earlier introduction of a permanent bailout fund, should help stop contagion.
Trichet said that was the ECB's assumption too.
The working assumption is that when the EFSF is up and running and able to intervene in the secondary market, we take it that it will ensure better financial stability and that it will permit us not to help restore an appropriate transmission of monetary policy -- that is the working assumption, he said.
(Reporting By Jan Strupczewski, editing by Mike Peacock)