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Markets Will Force the ECB to Buy Bonds: Analysts

If the European Central Bank commits to a program to buy bonds from 'danger' states then the euro zone should stay intact, Patrick Armstrong, managing partner at Armstrong Investment Management, told CNBC Wednesday.

E.U.
Photo: Bloomberg | Getty Imgaes
E.U.

"Assuming the ECB is willing to buy bonds and creates a line in the sand, assuming Italy delivers on its austerity that it will buy bonds on yields anything above 6 percent, something unequivocal," Armstrong said.

As the crisis has deepened, recent days have seen analysts and policymakers mooting the idea of an euro zone break-up or a re-ordering of the euro currency into two separate, core and periphery, currencies.

The ECB bought Spanish and Italian Bonds on Wednesday, traders told CNBC.

This followed Yves Mersch's, ECB Council Member, comments to CNBC that the ECB mandate did not allow for it to become a lender of last resort.

Armstrong said the ECB now needed to take decisive action and do something 'unlimited'.

"Germany may have to re-write its constitution, but you need something unlimited, unequivocal to get yields to something that is manageable and we're not there yet," Armstrong added.

He added that yields at 6 percent for Italian debt would still be manageable for the country.

"As long as the austerity measures come into play, you force these measures, the ECB should feel safe to buy these bonds without the risk of haircuts and default," Armstrong said.

Rob Cox, US editor at Reuters Breakingviews, told CNBC that the ECB would act because the worst-case scenario would be for them to preside over the disintegration of the euro.

"If you have 7 percent Italian bond yields, if you have 6 percent Spanish bond yields, they're not going to be able to make it and that is a greater danger than anything else," Cox said.

Armstrong echoed the view that the ECB had no choice but to save the euro zone.

"There is no real alternative. The market is forcing the hand of the ECB. They don't have the mandate to do it but there are no other buyers for these bonds and the ECB won't let the euro fall apart," Armstrong said.

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