Angela Merkel ready to relent on bailout deal to give Spain and Italy a lifeline

Under intense pressure at the G20 summit in Mexico to take more decisive action to contain the European sovereign debt crisis, eurozone leaders were reported last night to be preparing to allow the Continent's bailout funds to intervene directly in the capital markets to ease the pressure on Spain and Italy.

G20 sources suggested that Angela Merkel, the German Chancellor, was preparing to allow eurozone institutions to begin buying bonds issued by member state's governments. The purpose of the intervention would be to bring down sovereign bond yields of weaker eurozone states, which have been pushed up to unsustainable levels by wary investors in recent months. Spanish 10-year yields this week hit their highest levels in the history of the single currency at 7.28 per cent.

An impending move was hinted at by the Chancellor George Osborne last night. "We will see what the eurozone announce in the next couple of weeks, but there is no doubt that they realise that individual measures in indivi dual countries are by themselves not enough," he said.

"These are systemic problems which require a system answer."

It is thought that both the €500bn European Stability Mechanism (ESM), which will be established next month, and the existing €440bn European Financial Stability Facility (EFSF), could be given the go-ahead to purchase Spanish and Italian bonds.

This will have the effect of reducing the yields – or interest rate – on the bonds and thus allow Madrid and Rome to continue to fund their deficits and roll over their debt without having to apply for a formal bailout.

Up until now the EFSF has been used to make loans directly to eurozone states that have lost their capacity to fund themselves in the financial markets. But it has, so far, not been used to buy the bonds of distressed nations directly. Northern European nations, led by Germany, have insisted that the fund must only be used to make loans to nations that formally apply for a bailout. The bond-buying initiative, assuming it goes ahead, was already being regarded by some in Los Cabos last night as a significant moment in the three-year European debt crisis.

However, a German government spokesman insisted last night that there had been "no change" in Berlin's position on the use of the funds of the eurozone bailout funds.

The announcement of these new measures could come at a meeting of the eurozone powers that will be hosted by the Italian Prime Minister, Mario Monti, in Rome on Friday. Those attending will include Ms Merkel and François Hollande, the new French President.

On the sidelines of the G20 meeting yesterday, Mr Hollande said that the eurozone must help itself. "Mrs Merkel and I know that Europe must have its own response," he said. "It must not be given to us from the outside."

Details of the bond-buying plan were said to have been discussed in broad terms at a side meeting between eurozone leaders yesterday morning. The Prime Minister, David Cameron, and the US President, Barack Obama were also present.

An early draft copy of the G20 communique also suggested last night that eurozone nations are preparing to make further moves in the direction of a banking union.

It said: "We support the intention to consider concrete steps towards a more integrated financial architecture encompassing banking supervision, resolution, and recapitalisation, and deposit insurance."

This is expected to be followed up at a European Union summit in Brussels next week. A banking union has been put forward as a way of heading off a potentially disastrous run on banks in nations on the eurozone periphery.

Depositors have been pulling their savings out of Greek and Spanish banks in recent weeks in fear that these nations could leave the single currency. However, the German government continues to rule out a mutualisation of eurozone sovereign debt, something else that has been called for as a vital stabilisation policy.

The draft communique also said that eurozone members would take "all necessary policy measures to safeguard the integrity and stability of the area, improve the feedback loop between sovereigns and banks".

The G20: What key players wanted from talks

France

François Hollande supports growth over austerity and will have been keen to promote that agenda. But he met opposition with David Cameron slamming his tax-and-spend plans.

Italy

With Italy's 10-year sovereign debt yields rising, PM Mario Monti will have sought assurances that stronger states will prop up weaker members, to prevent contagion to its own finances.

USA

Barack Obama came ready to urge more decisive action on eurozone crisis - a weaker Europe means harder path to growth for US. But they abstained from replenishing the IMF's war chest.

Germany

Angela Merkel has had to walk a tricky policy tightrope. While showing a willingness to keep helping beleaguered European partners, she has stood firm on her insistence on austerity.

China

Hu Jintao is worried that the eurozone crisis will harm its economy, so has this week increased its contributions to the IMF by $43bn, increasing the size of the IMF's war chest to $456bn.

Britain

David Cameron has had a tricky test, needing to balance the increasingly desperate needs of a flagging eurozone and ensuring he is not seen giving in too easily to demands from Brussels.

Russia

Pledged $10bn to IMF's emergency coffers as part of a move Vladimir Putin – and the other BRICS leaders – are hoping will enhance their voting muscle on the Washington-based fund.

IMF

The International Monetary Fund, led by Christine Lagarde, has got just what it sought from the G20: more money to rescue European countries teetering on the brink of bankruptcy.