European Central Bank chief Mario Draghi told euro zone governments on Friday to act fast to get their rescue fund up and running, expressing exasperation at their lack of progress in responding to the escalating debt crisis.
The ECB is under intense pressure to play a greater role in tackling the euro zone crisis. A Reuters poll of 50 bond strategists in Europe and the United States gave an even probability that it would eventually agree to print money.
Chancellor Angela Merkel of Germany rebuffed demands from British Prime Minister David Cameron for decisive action, making clear she favoured a step-by-step approach that has seen Germany resist calls for the ECB to backstop other governments.
The British demand that we use a large amount of firepower to win back credibility for the euro zone is right, Merkel said. But we have to take care that we don't pretend to have powers we don't have. Because the markets will figure out very quickly that this won't work.
A Reuters poll of 50 bond strategists in Europe and the United States however gave an even probability that the ECB would eventually agree to print money.
Draghi put the onus firmly on governments, saying they had failed to put into practice decisions underpinning the European Financial Stability Facility -- the rescue fund which they have promised to give more firepower without yet explaining how.
Where is the implementation of these long-standing decisions? Draghi said at a banking conference in Frankfurt. We should not be waiting any longer.
Many analysts believe the only way to stem the contagion in a crisis that began with Greece but now risks engulfing Italy, Spain and even France is for the ECB to buy up large quantities of bonds, effectively the sort of 'quantitative easing' undertaken by the U.S. and British central banks.
That would be a highly controversial break from its existing policy, where it offsets government bond purchases by draining liquidity from the system in separate operations.
While the ECB, with strong German support, is anxious to remain free from political interference and is resisting calls to take major action, it has made limited bond purchases that have steadied investors' nerves.
The euro rose on Friday as pressure on Italian and Spanish bonds eased after the ECB stepped in to stabilize the market, but fears that both countries' borrowing costs are at unsustainable levels sent European shares to new five-week lows.
Deutsche Bank Chief Executive Josef Ackermann said European states could not rely on the ECB to solve the euro zone debt crisis. The ECB's primary role should not be to take up these bonds, he said.
Euro zone governments have set a December deadline to strengthen the EFSF but these efforts have been undermined by delays, surging borrowing costs and scant investor interest.
In Rome, Prime Minister Mario Monti won an overwhelming vote of confidence in parliament after warning politicians they would have to face the Italian public if they sabotaged a sweeping package of reforms aimed at ending an acute debt crisis
But we think that if we do a good job, then you too, when you give us a vote of confidence or withdraw it, should remember what the consequences will be for citizens' confidence in you, said Monti, who was sworn in on Wednesday as head of a government of experts after a rushed transition from the discredited Silvio Berlusconi.
With Italy's borrowing costs now at unsustainable levels, Monti will have to work fast to calm financial markets, given that Italy needs to refinance some 200 billion euros ($273 billion) of bonds by the end of April.
Greece's new government took a first step toward meeting terms of an international bailout its needs in order to avoid bankruptcy, submitting a budget bill that foresees no new austerity measures next year as long as reforms are enacted.
The draft predicted Greece would slide into a fifth year of recession, but economists said years of tax hikes, public salary and pension cuts and other austerity measures could send the economy deeper into contraction and the draft spending plan's forecasts are probably too optimistic.
But still more important, analysts said, was a rift between parties in technocrat Prime Minister Lucas Papademos's unity coalition caused by jockeying for position by the conservative New Democracy party ahead of an election slated for February 19.
Papademos must win pledges from the rival parties that they will do what it takes to meet bailout terms or Greece's lenders will withhold an 8 billion euro aid tranche Athens needs to dodge default next month, plus longer-term financing later.
(Writing by Giles Elgood; Editing by Mike Peacock and Patrick Graham)