The European Central Bank remains divided over whether to buy Italian government bonds but even some of those who favor the move say Italy should do more to front-load austerity measures, ECB sources said Saturday.
Two sources said they expected ECB President Jean-Claude Trichet to hold a teleconference of the bank's policy-setting Governing Council over the weekend to discuss how to respond to continuing turmoil on financial markets and Italy's latest measures.
The decision by credit ratings agency Standard & Poor's to downgrade the United States' AAA rating to AA+ seems bound to aggravate turbulence when markets reopen Monday.
Italian and Spanish bond yields hit 14-year highs above 6 percent last week even after the ECB decided to resume buying bonds of euro zone sovereigns in difficulty, because it limited its purchases to Irish and Portuguese bonds.
ECB policymakers made clear at the time that Rome would have to accelerate fiscal and structural economic reforms before the central bank would consider buying Italian debt.
Italian Prime Minister Silvio Berlusconi announced late on Friday he would bring forward measures to balance the budget by one year to 2013, swiftly enshrine a balanced budget rule in the constitution and enact welfare and labor market reforms by decree.
Asked whether the announcement, made under strong pressure from EU peers and the central bank, was enough to persuade the ECB to buy Italian bonds, once ECB source said: "I'm not sure that it's sufficient but it is going in the right direction.
"They should do a bit more because the Italian program is still back-loaded and most of the measures still don't bite until after the 2013 election," the source said.
Other ECB sources said that the four German, Dutch and Luxembourg members of the Governing Council who voted against re-activating the ECB's bond-buying program last Thursday remained opposed to the move in principle.
"In case of such a 'deal' with the Italians, the ECB would ultimately be leaving the area of monetary policy," one source in that camp said.
Another said Trichet and the majority of the ECB council seemed willing to "play a game" with the Italians, but that would depart from the central bank's proper role as responsible for monetary policy.
The first ECB source said it would require a further decision of the Governing Council to authorize the purchase of Italian and Spanish bonds, but this could be taken quickly by teleconference if the conditions were met.
European Economic and Monetary Affairs Commissioner Olli Rehn praised the Italian moves in a first official EU reaction and said swift implementation would now be crucial.
Asked in a telephone interview with Reuters whether the Italian moves were sufficient to persuade the ECB to buy Italian bonds, Rehn said he could not speak for the central bank, which is independent from political authorities.
However, he said: "The Commission's view is that the fiscal strategy is striking the right balance. The essential thing is rigorous implementation."
(Reporting by Paul Taylor; Editing by Susan Fenton)