ECB Support May Prove `Critical' for Spain as Crisis Worsens, Buiter Says
The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Citigroup Inc. Chief Economist Willem Buiter said.
“Once Spain needs assistance, the support of the ECB will be critical,” Buiter said in a note to investors yesterday. A Spanish crisis would “stretch the resources” of the bailout fund set up in May by European governments “perhaps beyond its current limits.”
Spanish bonds slid by the most since the euro’s debut yesterday as a rescue package for Ireland failed to stop contagion spreading through the euro region. While the ECB bought the most euro-region government bonds in two months last week, the strategy has been criticized by some policy makers for threatening to compromise the central bank’s independence.
The yield on Spain’s 10-year government bond jumped 25 basis points to 5.42 percent yesterday and the cost of insuring Portugal against default rose to a record. Spanish Finance Minister Elena Salgado said Nov. 28 that her country has no plans to ask for aid.
As EU leaders struggle to contain market turmoil, attention is turning once more to the ECB. The central bank took the unprecedented step in May of buying government bonds as part of a broader EU package to shore up the euro. While the program aims to smooth the functioning of bond markets, Bundesbank President Axel Weber says there’s no evidence this has been successful. On Nov. 19, he said the policy should be stopped “sooner than later.”
ECB President Jean-Claude Trichet will brief reporters on the central bank’s next steps after its rate decision on Dec. 2. The Frankfurt-based ECB completed 1.3 billion euros ($1.8 billion) of bond purchases last week, the most since the end of September, taking the total bought to 67 billion euros.
Unlike the Federal Reserve and the Bank of England, the ECB currently sterilizes its bond purchases to neutralize their impact on overall money supply.
Buiter argued that the ECB must be prepared to wield its power as the euro region’s most powerful financial body and “take on more of the burden of supporting ailing banks and sovereigns.”
“As the sole source of unlimited liquidity and as an institution that can take decisions without the need for political or popular approval, it is the only institution that can take actions of sufficient size and with sufficient speed to stave off major financial instability,” Buiter said.
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