The European Central Bank is capping its weekly bond purchases at 20 billion euros and euro zone officials hope its new bumper liquidity provision will allow banks to buy more government debt and ease crisis-hit states' borrowing costs, ECB sources said on Friday.
The bank has bought no more than 22 billion euros worth of bonds in any week since it reactivated its bond-buy program in August. ECB sources said it would keep purchases to a maximum of 20 billion euros now and is not considering bigger action in response to an EU summit decision to create a fiscal union.
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Twenty-three of the EU's 27 leaders agreed to pursue tighter integration with stricter budget rules for the euro zone, though Britain said it could not accept proposed amendments to the EU treaty after failing to secure concessions for itself.
"We more or less anticipated what would come out," one ECB source said. "We don't see any need for new deliberation."
The ECB bond-buy cap would remain at the level set weekly for the last few weeks by the Governing Council, a second source said. Weekly purchases have not topped 10 billion euros since September, less than half the limit.
"You will see some further purchases but not the huge bazooka that some people in the markets and the media are awaiting," the second source said.
ECB President Mario Draghi had already dashed market expectations of increased bond buys in return for tougher budget rules a day earlier, when the central bank nonetheless agreed to boost its liquidity provision to banks.
At its monetary policy meeting on Thursday, the ECB offered ultra-long 3-year financing to banks and eased rules on the collateral it requires from them to tap its funds. It also cut its interest rates to a record low of 1.0 percent.
Euro zone leaders seized on the increased liquidity provision as a means to help fight the debt crisis, which has pushed up borrowing costs for countries on the periphery of the bloc - including G7 economy Italy - to unsustainable levels.
French President Nicolas Sarkozy said the ECB's increased provision of funds meant governments in countries like Italy and Spain could look to their countries' banks to buy their bonds.
"This means that each state can turn to its banks, which will have liquidity at their disposal," Sarkozy told reporters at the summit in Brussels.
Markets were unconvinced that banks would start buying the bonds of peripheral euro zone countries as a result of increased ECB liquidity provision, however, and Italian bond yields rose on Friday, prompting the ECB to intervene in the market.
The notion that commercial banks could step up their purchases of government bonds looks optimistic given the same banks are being asked to deleverage and recapitalize if necessary.
"There is no obvious link between what the ECB did yesterday and restarting the whole bond market," said Deutsche Bank economist Gilles Moec.
"This kind of mechanical link - I don't think it's right," he said, though he added that the summit agreement on tighter fiscal rules, together with the ECB's liquidity provision to banks, could increase market confidence in the euro zone.
Draghi heightened expectations last week that the ECB could do more to fight the crisis by saying "other elements might follow" if governments agreed tighter budget controls first.
ECB watchers had taken that to mean the bank would step up its bond purchases but he firmly played down that interpretation on Thursday, instead insisting tighter fiscal rules were the best policy response to the crisis.
On leaving the EU summit in the early hours of Friday, Draghi said the meeting had laid a good basis for a new "fiscal compact" among the euro zone countries, although the details still needed to be sorted out in the days ahead.
"It's going to be the basis for a good fiscal compact and more discipline in economic policy in the euro area members," he told reporters. "We came to conclusions that will have to be fleshed out more in the coming days."