Italy raises bond buying idea at G20, Germany cold

LOS CABOS, Mexico (Reuters) - Italy put forward a proposal at the G20 summit in Mexico on Tuesday for the euro zone's rescue funds to start buying the debt of distressed EU countries, European officials said, but Germany said no specific initiative was discussed.

The Italian proposal would involve the EU's two rescue funds, known as the EFSF and the ESM, buying bonds of countries such as Spain and Italy in the secondary market to help bring down bond yields and lower refinancing costs.

The ideas were first set out by Italy's Europe minister, Enzo Moavero, in Brussels on Monday.

Moavero said the plans would be discussed at a meeting of finance ministers in Luxembourg on June 21-22, but Italian Prime Minister Mario Monti decided to bring them up with G20 leaders at the two-day summit, European officials said.

The 440-billion-euro European Financial Stability Facility and the 500-billion-euro European Stability Mechanism, which comes into force next month, both have the capacity to buy bonds in the primary and the secondary market, although that can only happen with a request from the country in question and involves signing up to a rescue program.

Such a move would be similar to the bond buying the European Central Bank has carried out in the past to lower the borrowing costs of countries such as Greece, Ireland, Spain and Italy, except now the purchases would come from EU rescue funds.

Italy, where 10-year bond yields are hovering just below 6.0 percent, would have a vested interest in such a plan being put into action. Spain, where 10-year yields are over 7.0 percent, would also potentially benefit from such a step.

British media reported that German Chancellor Angela Merkel had effectively backed the proposal and was willing to sanction the EFSF and ESM buying distressed debt in the secondary market.

But a German official said that was not accurate.

"Secondary market bond purchases are one of many instruments available to the EFSF and ESM," a German government official told Reuters, speaking on condition of anonymity.

But he added: "There was no discussion here in Los Cabos about any concrete initiatives" related to such purchases.

Other officials said a variety of ideas were circulating at the summit but none of them was set to be put into action soon.

"There is nothing that has been agreed upon," one official said. "This is not a discussion that is going to produce action today or anytime soon."

The Financial Times reported that the communiqué from the summit would explicitly commit euro zone countries to "driving down borrowing costs across the single currency area." But sources said no such language was in the final communiqué.

"It will not turn up in the declaration," one European official said.

(Reporting by Gernot Heller and Luke Baker; Writing by Noah Barkin; Editing by Padraic Cassidy)