European leaders hunted for solutions to the debt crisis,helping Italy and Spain gain a respite from the market turbulenceafter the resumption of the European Central Bank's bond-buyingprogram.

With global stock markets sinking for an eighth day, GermanChancellor Angela Merkel and French President Nicolas Sarkozy planto speak by phone later today, their offices said. The EuropeanCommission called for an expansion of the European FinancialStability Facility, the 440 billion-euro ($623 billion) rescuefund, earning a rebuke from Germany.

The EFSF “should be reinforced and the scope widened,” EuropeanUnion Economic and Monetary Commissioner Olli Rehn told reportersin Brussels. “Experience has shown that we need to stand ready” toact, “preferably ahead of the curve, to be effective.” GermanEconomy Minister Philipp Roesler rejected taking more measures.

Europe's government leaders were back in the spotlight after adivided ECB restarted its bond-purchase program yesterday followinga four-month hiatus. The central bank refused to extend thepurchases to Italy and Spain, the two countries at the center ofthe current turmoil.

“Would the ECB please get serious?” Holger Schmieding, chiefeconomist at Joh. Berenberg Gossler & Co. in London, said in ane-mailed note. Limiting the bond-buying to Ireland and Portugalbrings to mind “a fire brigade that responds to a major emergencybut then drives to the wrong place and refuses to turn around anddouse the real fire.”

Merkel-Sarkozy Call
World stock marketshave lost more than $4.4 trillion since July 26 as speculationmounts that the global economy faces a new recession that woulddeepen Europe's debt woes.

Merkel and Sarkozy, the leaders of the euro region's two largesteconomies, plan to address the crisis when they speak today, aChancellery aide said. The French leader also planned to callSpanish Prime Minister Jose Luis Rodriguez Zapatero.

The technical and political details of revamping the mainbailout mechanism will be completed by early September, Rehn said.Policy makers need to be “more disciplined” in communicating theiractions, he said, adding that European leaders had not anticipatedthe market developments.

“Markets have not reacted as we expected or hoped for to themeasures agreed by euro-area heads of state and government on 21July,” Rehn said. “The spread of bond-market tensions across theeuro area is, however, not justified by economic and budgetaryfundamentals.”

Bonds Rally
Spanish and Italian bondsrallied on speculation that policy makers may take more action toarrest the crisis. Spanish 10-year yields dropped 22 basis pointsto 6.06 percent, while similar maturity Italian debt declined 4basis points to 6.16 percent.

The euro was up 0.4 percent at $1.4153 at 1:55 p.m. inBerlin.

Over the opposition of the German central bank, the ECB boughtbonds of Ireland and Portugal yesterday, two countries drawing onofficial aid. It did so again today, according to two people withknowledge of the transactions. The ECB stopped short of buyingItalian bonds, and ECB President Jean-Claude Trichet said Italy hasto show it is “ahead of the curve” in taming its debt.

A clash over the size of the bailout fund flared betweenEuropean officials and Germany, the biggest underwriter of aidpackages to Greece, Ireland and Portugal.

A call by Jose Barroso, commission president, for a review of“all elements” including the fund's size was rejected today byGermany's Roesler.

'Frantic Ranting'
“A debate like this isnot timely,” less than a month after European leaders agreed toleave its size untouched, Roesler told Deutsche Presse-Agentur inOslo. His predecessor, Rainer Bruederle, now floor leader ofMerkel's Free Democratic Party coalition partner, dismissedBarroso's proposals as “frantic ranting,” he told Bildnewspaper.

The commission is pressing European governments to quickly enactlast month's decision to empower the rescue fund to buy bonds inthe secondary market, offer precautionary credit lines and lend torecapitalize banks.

Country-by-country approval of the strengthened EFSF is delayeduntil after parliaments return from the summer break.

With a “huge amount of work” involved already, calling inparliament early or “loading new proposals onto us is just notgoing to fly,” Norbert Barthle, budget policy spokesman forMerkel's Christian Democratic bloc in parliament, said by phone.“I'm not saying new proposals can't be discussed at some point,save one: eurobonds. Any mention of eurobonds from the German pointof view is taboo, damaging, undesired.”

Bloomberg News

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