What started out as an extremely poor idea has now turned into a bet the bank bond-buying strategy as ECB Signals Purchases of Italian, Spanish Bonds.

The European Central Bank said it will “actively implement” its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.

In a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the Frankfurt-based ECB welcomed Italy and Spain’s efforts to reduce their budget deficits. It also called on all euro-area governments to follow through on the measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.

“It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program,” the central bank said. “This program has been designed to help restoring a better transmission of our monetary policy decisions — taking account of dysfunctional market segments — and therefore to ensure price stability in the euro area.”

Buying Italian and Spanish debt may open the ECB to accusations it is bailing out profligate nations, breaching a key principle in the euro zone’s founding treaty and eroding its credibility. Germany’s Bundesbank opposes the move.

“The ECB is once again intervening as the last line of defense,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. “The intervention will put a halt to the bond market crash that some member states faced. However, the ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe.”

The initial reaction from the market was swift and severe. S&P; futures opened up 30 points in the red, Nasdaq futures 47 points in the red.

The night is still young and the intervention in Italian bonds begins tomorrow.

Mike “Mish” Shedlock
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