“The chancellor is like everybody else returning from vacation — you enjoy a different kind of rhythm while on vacation — nevertheless she is returning to work very happily,” Steffen Seibert, Merkel's chief spokesman, told reporters at a regular government press conference in Berlin today. “There will be a lot to do, a lot of energy, which you'll see in the coming days and weeks.”

Italy's 10-year bonds advanced, with the rate slipping 5 basis points to 5.84 percent as of 12:56 p.m. in Berlin, after it sold its maximum target at an auction of one-year bills. Yields on equivalent Spanish debt dropped 9 basis points to 6.79 percent. The euro traded at $1.2339, up 0.4 percent.

While the ECB said that it would undertake bond purchases only if troubled nations promise measures to improve their economic health, Italy and Spain have yet to decide whether they will request help.

'Formidable Challenge'

“To ensure that such interventions help to bring down bond yields in a lasting way, they will only be available for member states that pursue sound budgetary policies, adopt structural reforms for growth, and address macroeconomic imbalances,” European Economic and Monetary Affairs Commissioner Olli Rehn said in an op-ed published in the Wall Street Journal today, without specifying any nation by name. Those states face a “formidable challenge,” with “little breathing space to adopt the game-changing reforms that are essential for long-term gain.”

Coene, who also heads Belgium's central bank, told the two newspapers that ECB officials are divided on what conditions should be agreed. The central bank's experience a year ago demonstrates why the ECB is reluctant to step in, he said.

“We haven't forgotten what happened in August of last year: We bought Italian bonds and right after that the Italian government reneged on its pledges,” Coene was quoted as saying. “The conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.”

ECB purchases won't return investor confidence in Spain and Italy, he said, attributing the rise in bond yields to a lack of trust in those countries to repair their economies.

“Every board member, including the Spanish and Italian ones, knows that our actions will have a short-lived effect” and that market turmoil “will stop only when there's no more Spanish and Italian bonds in the market,” Coene said.

Italian bond spreads need to retreat by the end of the year to avoid “strong” contagion to the economy, said Fabrizio Viola, chief executive officer of Italy's Banca Monte dei Paschi di Siena SpA, La Repubblica reported on Aug. 11. He urged the ECB and the region's bailout funds to buy sovereign debt on the primary and secondary markets, the newspaper said.

The euro's permanent rescue fund, the 500 billion-euro ($614 billion) European Stability Mechanism, won't become active until Germany's Federal Constitutional Court rules on its viability on Sept. 12. Only with a court endorsement will the German government be able to ratify the ESM treaty.

German Conditions

“It is not our base case that the constitutional court will block the ESM, though it will likely be a close decision,” Joachim Fels, chief economist at Morgan Stanley in London, wrote in a note to clients yesterday. Still, the judges “could well attach conditions that will make it difficult for the government to make further integration steps.”

The possibility that Germany's high court will demand greater elector participation in euro decisions raised the prospect of a referendum in the euro area's biggest economy, placing the country's commitment to the currency in the hands of voters at time that polls show rising discontent with the costs of the crisis.

While Merkel has resisted the notion of a referendum, her coalition partners said last week that Germany's role in the crisis might need to be put to a vote. The court's decision may trigger an automatic referendum if the judges rule that the ESM and the transfer of sovereign rights require constitutional change, Hans Michelbach, a Merkel ally from the Bavarian Christian Social Union, said in an interview on Aug. 10.

The month-long wait for the ESM decision will be paralleled by anticipation on whether Greece continues to receive euro rescue funds. Greece's troika of international creditors — the ECB, the European Commission and the International Monetary Fund — will return to Athens in early September to resume talks as Greek Prime Minister Antonis Samaras seeks to hammer out 11.5 billion euros in budget cuts for 2013 and 2014.

Greece's economy contracted for a ninth straight quarter, declining 6.2 percent in the second three-month period of this year from the same period last year, the Hellenic Statistical Authority said today. That makes it harder for the government to meet the budget-reduction targets required.

“The problems of the euro area continue with no obvious end in sight,” Bank of England Governor Mervyn King said in the Mail on Sunday newspaper yesterday.

Bloomberg News

Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.