AFTER 2? years of incremental crisis management and false starts, a bargain is beginning to emerge between Europe's politicians and central bankers over how to calm bond markets and end the debt tumult threatening the euro's survival.
The European Central Bank sketched out its side of the deal last week, offering to buy Italy's and Spain's bonds on the market as long as the euro governments' bailout fund makes purchases directly from the two countries' treasuries and ties them to tough conditions.
The ECB president, Mario Draghi, offered only a glimpse of the new strategy, with actual interventions weeks or months away and a host of obstacles standing in the way before Europe can claim to be on a path out of the crisis that emerged in Greece in late 2009. Investors out for a quicker fix pushed down the euro, European stocks and bonds of at-risk countries.
"All of the announcements, if transferred into actual activity, would be close to the big bazooka approach that the markets are looking for," said Charles Diebel, the head of market strategy at Lloyds Banking Group in London. "Market disappointment is hardly surprising in this context but we may well find this lays the groundwork for the grand plan in coming weeks."
In the trading rooms, sceptics recalled the failure of authorities to deliver on prior crisis-fighting pledges, whether by restricting the use of the original ?440 billion ($516 billion) rescue fund or forcing through a restructuring of Greece's debt after promising not to.
"The big bazooka is Draghi's implied promises, which have not been delivered upon," said Marc Ostwald, a strategist at Monument Securities. "Markets are saying this is all talk, there's nothing concrete."
What is different is that the two countries with their backs against the wall, Italy and Spain, represent 28 per cent of the $US12 trillion ($11.35 trillion) economy and have new leaders that have forced through deficit-slashing measures despite mounting domestic opposition.
"The ECB's decision is important," the French President, Francois Hollande, told reporters in Paris. "It allows the ECB to intervene when it's necessary." The German Chancellor, Angela Merkel, didn't air any immediate qualms last month, she and Mr Hollande made a joint pledge "to do everything to safeguard" the euro.
Europe's political establishment has courted the ECB by giving Mr Draghi a lead role in fixing the birth defects of the monetary union that go back to the 1991 Maastricht Treaty.
Along with the European Union President, Herman Van Rompuy, the European Commission President, Jose Barroso, and the Luxembourg Prime Minister, Jean-Claude Juncker, the central banker is co-drafting proposals for a closer fiscal union and more integrated banking system.
Mr Draghi's pledge took the ECB further away from its roots as a politically autonomous central bank, modelled on Germany's Bundesbank, with prime responsibility for containing inflation and only a lesser focus on the broader economy and the stability of the banking system.
Bond traders ruling Europe Page 6