Ready to do everything it takes, ECB steps up Italian bond buys

By Balazs Koranyi and Stefano Bernabei

FRANKFURT/ROME (Reuters) - The European Central Bank is ready to do everything in its power to ease market turmoil, a top executive said on Wednesday, as the bank stepped up purchases of Italian bonds to stem the biggest sell-off since the euro zone's debt crisis.

Invoking the pledge of former ECB president Mario Draghi to do "whatever it takes" to save the euro, ECB board member Isabel Schnabel said the ECB was ready to counter market turmoil, a message aimed at halting a massive bond market sell-off that has raised doubts about the sustainability of the country's debt.

With the country in lockdown because of the coronavirus, the Italian economy was heading for a deep recession and 10-year borrowing costs briefly pushed past 3% before ECB action calmed some fears.

"The ECB is ready to do everything in its mandate to counter market turmoil that disrupts monetary policy transmission, otherwise monetary policy cannot function," Schnabel, who is in charge of the ECB's market operations, told German newspaper Die Zeit in an interview.

A source at the Italian central bank said it was stepping up its purchases to stem the rout, using the flexibility embedded in the ECB's decision to temporarily increase bond purchases.

The ECB last week agreed on an additional 120 billion euros worth of debt purchases before the end of the year, retaining flexibility over when and where to buy.

"The interventions are flexible both in timing and in terms of concerned markets and will continue for as long as necessary," the Bank of Italy source said.

The ECB declined to comment on the Italian purchases but said it remained ready to act.

"The ECB stands ready to adjust all of its measures, as appropriate, should this be needed to safeguard liquidity conditions in the banking system and to ensure the smooth transmission of its monetary policy in all jurisdictions," it said.

DEEP RECESSION

The market pressure comes as the euro zone faces recession from disruptions caused by the coronavirus outbreak.

Although the ECB last week projected full-year growth at 0.8%, ECB Chief Christine Lagarde told the heads of government this week that a three-month lockdown could cause the euro zone's economy to shrink by 5% this year, the Frankfurter Allgemeine reported on Wednesday.

Illustrating the market stress, the ECB lent euro zone banks $112 billion at two auctions aimed at easing stress in the U.S. dollar funding market, part of the financial fallout of the coronavirus outbreak.

The ECB's problem is that the borrowing costs of its weakest members soared in recent days, even as the bank said it was willing to intervene.

Ten-year Italian yields fell back to around 2.63% by Wednesday afternoon -- still 283 basis points above 10-year German yields <DE10IT10=RR>.

Spreads over Spanish bonds were 155 basis points. In Greece, which is not part of the ECB's asset purchase programme, the spread widened to almost 413 basis points.

(Reporting by Balazs Koranyi, Francesco Canepa and Jesus Aguado; additional reporting by Madeline Chambers and Dhara Ranasinghe; editing by Jason Neely, William Maclean, Larry King)