Return of Long-Term Bond Buyers Seen as Crucial to Europe LONDON - As Europe slouches toward a monetary union that aims to force euro area governments to cede control over their banks and budgets, a crucial question remains unanswered: how to persuade investors to buy, and hold for the long term, the bonds of at-risk economies like Italy and Spain. Both countries have debt and deficit levels that are no worse, and in some cases better, than those of Britain, Japan and the United States. But because they cannot devalue their currencies and must instead impose growth-sapping economic measures to regain competitiveness, their bonds have traded as if their economies are near insolvent. Meanwhile, the securities of debt-racked Britain, for example, are snapped up with abandon. It is a paradox that lies at the heart of the European debt crisis. On Friday at its most recent summit meeting, Brussels took a halting first step to addressing this issue on a permanent basis. Euro zone leaders proposed that Europe's current and future rescue facilities might buy Italian and Spanish bonds as long as these countries fulfilled Germany's austerity demands and met debt and deficit targets. The market, expecting more waffling, jumped and the yields on 10-year Spanish and Italian bonds dropped sharply as investors celebrated the prospect that Europe might become a buyer of last resort of its beaten-down bonds. Still, Friday's euphoria notwithstanding, economists and market participants remain doubtful that the bond market fears can be permanently assuaged until the European Central Bank intervenes with the force and conviction shown by its peers in the United States and Britain. Paul De Grauwe, a Belgian economist at the London School of Economics, says he believes that the latest step will not be enough. Mr. De Grauwe has written extensively on how the cycle of fear and panic in the bond markets is pushing countries that may not need a bailout to ask for one. The euro zone's temporary bailout fund, the European Financial Stability Facility, which has only 248 billion euros at its disposal and must first raise the money on the bond market, does not have the firepower to convince skittish investors that Europe is serious, he said. Italy and Spain alone have a total of nearly 2.5 trillion euros in sovereign bonds outstanding. Mr. De Grauwe proposes instead, that the European Central Bank announce that it will be an aggressive buyer of Spanish or Italian bonds until the spread - or the difference between the yields on these bonds and benchmark German bonds - reaches a certain level, say 300 basis points, compared to the recent level of 500 basis points and above. "You would then have a floor on bond prices and it would be attractive for investors to buy Spanish bonds again," said Mr. De Grauwe. His most recent paper claims that the Spanish and Italian bond rout has been driven more by the psychology of fear than hard and true economic numbers. "The E.F.S.F. does not have the credibility given its resources," Mr. De Grauwe said. What you need are the unlimited resources of a central bank. Such a forceful approach has been resisted by Germany, the bank's largest shareholder, on the basis that countries would not proceed with necessary reforms. It is also true that the E.C.B. has intervened in the markets before and is said to own close to 150 billion euros of weak euro zone country bonds. The buying has had little effect, though, because the numbers have been relatively small and because the operations have been done mostly in secret, largely mitigating their effect. If the bank were to set an open target, in the same vein that Switzerland's central bank did last year when it shocked markets by declaring that it would limit the increase of the Swiss franc by intervening at a certain level, then perhaps bond investors would take heed. Instead, after the Greek debt restructuring and the Spanish bank bailout, foreign investors have been sellers of Spanish and Italian bonds, fearing that as the yields increase to near 7 percent and above, so does the risk that these countries will run out of money - even though the raw numbers would argue the opposite. Italy, for example, had a primary surplus in 2011 of 1.1 percent of gross domestic product, meaning its budget is more than balanced if one takes away interest payments. And Spain's debt last year was 68 percent of its G.D.P. - lower than Germany's and France's. Still, problems are severe in both countries: a banking collapse that required a 100 billion euro bailout in Spain and chronic stagnation and higher debt in Italy. Nevertheless, as Mr. De Grauwe would have it, Spain and perhaps even Italy could be forced into a bailout at some point because investors are fixated on the notion that, because they are in the euro zone, they will not have time and flexibility to make the necessary changes. Christopher Marks, the global head of debt capital markets at BNP Paribas, argues that this insolvency fear is being fanned by a new breed of short-term investors who have entered the market in the last year or two and have become the dominant voice, arguing loudly that Spain and Italy are destined to fail - and making investment bets to that effect by either selling short the bonds or buying credit-default swaps. The result is heightened volatility, lack of liquidity and ever-climbing yields - the bond market equivalent of fear - as longer-term core investors like pension funds, sovereign wealth funds and insurance companies have stopped buying these securities. "The traditional buyers of these bonds will return - but only when there is a decrease in volatility and the yield," said Mr. Marks. As to whether this latest promise by Europe to use the E.F.S.F. and its successor entity to intervene will make a long-term difference, Mr. Marks remains cautious. As always, details on how Europe would intervene in the bond markets were scant, outside of a statement in which Brussels said it would "do what is necessary to ensure financial stability in the euro area," by deploying the bailout vehicles. And that there would need to be a memorandum of understanding between the country in question and Europe regarding conditions to be met. In another concession to private sector creditors, Brussels said that loans made to Spain via the European Stability Mechanism, the successor bailout vehicle to the E.F.S.F., would not be considered senior to the claims of bond investors - thus easing fears of a debt restructuring and making Spanish bonds more attractive. Mr. Marks considers the summit meeting agreement "a short-term palliative." He says he believes that the bailout funds" ability to intervene with maximum effect will be tested sooner rather than later. Which gets to Mr. De Grauwe's point: until the E.C.B. can convince investors that it is truly backing the bonds of these countries - and that it can shock and awe, beyond just offering cheap, long-term loans - investors will keep calling Europe's bluff. "It's like a general saying that he will win a war by minimizing shooting," Mr. De Grauwe said. It just doesn't work.