European leaders at loggerheads over bonds plans to stabilise eurozone

Finnish Prime Minister rejects the use of bailout funds to help troubled states directly

European leaders were at loggerheads last night over the latest plan to stabilise the eurozone, after the Finnish Prime Minister rejected the idea of allowing the European bailout funds to buy the bonds of troubled states directly.

"These are instruments created to secure liquidity for countries in trouble and the funds are not sufficient for purchases made in the secondary markets," said Jyrki Katainen.

The idea of allowing the temporary European Financial Stability Facility (EFSF) and the incoming European Stability Mechanism, the emergency bailout funds which between them will have firepower of around €500bn, to buy up bonds directly was proposed by the Italian Prime Minister, Mario Monti, at the G20 meeting in Mexico earlier this week. It met with support from the French President, François Hollande, and the German Chancellor, Angela Merkel, did not rule it out.

The proposal was described as "intelligent" by the Spanish Foreign Minister, Jose Manuel Gracia- Margallo, yesterday, who added: "I think there needs to be an intervention in secondary markets of public debt".

Madrid's borrowing costs hit a euro-lifetime high of 7.2 per cent this week as nervous investors sold the country's debt in anticipation that Spain will become the fourth eurozone nation to apply for a full scale national rescue.

But Spanish borrowing costs fell back yesterday, in response to news of the bond-buying plan with 10-year Spanish yields falling to 6.75 per cent. There was also some relief for Italy, which has also seen its borrowing costs shooting up in recent weeks, where 10-year bond yields eased to 5.78 per cent. The Spanish stock market got a boost too, closing up 2 per cent, while Italy's main index rose by 2.1 per cent.

Eurozone governments agreed to give the EFSF the power to buy up sovereign debt directly to stabilise bond markets last year, but only if a nation made a formal application for assistance and if the move was approved by other eurozone nations. The plan is expected to be discussed in more detail at meeting tomorrow between Ms Merkel, Mr Monti and the Spanish Prime Minister, Mariano Rajoy.

The support of Germany will be crucial. Berlin appears not to have made up its mind yet."This is not a discussion that is going to produce action today or any time soon," one German official warned Reuters yesterday.

The G20 communique from Los Cabos said that leaders would take "important steps... that lead to sustainable borrowing costs" for eurozone members but gave no detail about how this would be achieved. The other European institution that has been buying up debt in recent years is the European Central Bank. It stepped in to the bond markets last summer after a previous destabilising run on Italian and Spanish debt.