AN EARLY morning rally yesterday in Spanish and Italian sovereign debt markets went into reverse later as the European Central Bank downplayed press reports about its future actions.

At the weekend, German magazine Der Spiegel claimed the ECB was to introduce a ceiling on the yields of weak countries’ bonds. This would require it to buy government bonds when their yield reached a ceiling set by the bank.

If the ECB were to do this, Italy and Spain would face a reduced risk of being locked out of the bond market. However, intervention of this kind exposes the ECB to greater losses in the event of either country defaulting.

The Spiegel report was widely attributed to be the trigger for the early morning rally.

The ECB responded promptly, saying it was “absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council”.

The German central bank and German finance ministry also rowed in to criticise the suggestion. The Bundesbank restated its opposition to bond-buying in principle and said that such intervention poses “considerable risks to stability”.

The comments from Germany reopened north-south divisions within the euro zone. Italian industry minister Corrado Passera attacked Bundesbank criticism of ECB plans for intervention in bond markets, saying such comments disrupted markets.

Despite the downplaying of the report on ECB intervention, Spanish bond yields closed well down on yesterday’s opening. Yields on the five-year were almost one quarter of a percentage point by the end of the trading day.

Italian yields, by contrast, were broadly unchanged over the course of the day.

Speculation that Spain would seek a full-scale bailout has continued in recent days, despite lower bond yields. Spain’s prime minister Mariano Rajoy has said his government will consider a rescue request only after the central bank makes clear what conditions would be attached to a bond-buying programme. ECB president Mario Draghi said this month that the central bank would intervene only if recipient countries agreed to new conditions.

A series of bilateral meetings between the leaders of the euro zone’s largest economies and Greece are scheduled for the coming days and are expected to focus on the crisis in the currency zone. – (Additional reporting Financial Times, Reuters)