European Central Bank President Mario Draghi will hold talks with Bundesbank President Jens Weidmann in the coming days in an effort to overcome the biggest stumbling block to a new raft of measures including bond purchases, two central bank officials said.

Having secured the backing of governments in Spain, France and Germany, Draghi is now seeking to win over ECB policy makers for a multi-pronged approach to reduce bond yields in countries such as Spain and Italy, the officials said on condition of anonymity because the talks are private.

Draghi's proposal involves Europe's rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the officials said. Further ECB rate cuts and long-term loans to banks are also up for discussion, one of the officials said.

The euro strengthened, and was up 0.4 percent on the day at $1.2337 as of 6:49 p.m. in London. U.S. stocks rallied and gold futures extended gains.

Draghi is trying to put together a game changer in the battle against the sovereign debt crisis, and winning Weidmann's support would enable him to present a united front to financial markets. Draghi flagged the intervention yesterday, saying the ECB will do whatever it takes to preserve the euro. The Bundesbank responded today by reiterating its opposition to ECB bond purchases.

Draghi will speak with Weidmann before the ECB's Governing Council convenes in Frankfurt on Aug. 2, the officials said. He has also reached out to other ECB policy makers in an effort to build consensus, they said. A Bundesbank spokesman declined to comment.

An ECB spokeswoman said in an e-mailed statement that it is usual practice and nothing special for Draghi to meet or talk with members of the Governing Council. She declined to comment on the content of any talks.

Draghi has already secured the endorsement of Germany and France for a plan to reduce bond yields in Spain and Italy, which are threatening the existence of the euro.

German Chancellor Angela Merkel and French President Francois Hollande echoed Draghi's language after a telephone conversation today, pledging to do everything to protect the single currency. The two largest euro-area economies are “bound by the deepest duty” to keep the 17-nation currency bloc intact, Merkel and Hollande said in a joint statement.

Increased Credibility

“German support increases the credibility of an ECB intervention immensely, as otherwise markets would have to fear a subsequent down-scaling of the policy action,” said Christian Schulz, senior economist at Berenberg Bank in London. “If the ECB is credible enough, bond yields would stabilize without the ECB buying many bonds at all.”

The yield on Spain's 10-year bond dropped to 6.74 percent today from 7.62 percent on July 24 as markets rallied on Draghi's signal of ECB intervention.

While granting a banking license to Europe's permanent rescue fund, the European Stability Mechanism, is a long-term aim of Draghi's, it is not part of the immediate crisis plan, one of the central bank officials said.

Government bond purchases have seen two German policy makers quit the ECB.

Vocal opponent Axel Weber stepped down as Bundesbank president last year and ECB chief economist Juergen Stark retired at the end of 2011. Both complained that the bond program blurred the line between fiscal and monetary policy and relieved pressure on governments to enact reforms.

A spokesman for the Frankfurt-based central bank said in a statement read over the phone earlier today that there haven't been any changes in its position on bond purchases. The Bundesbank has repeatedly said in the past that it views such buying critically because it blurs the line between monetary and fiscal policy, he said.

Bloomberg News

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ECB, Bundesbank Talk Bond Buys

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