Trichet Says ECB to Delay Emergency-Liquidity Withdrawal Amid Market Woes
The European Central Bank delayed its withdrawal of emergency liquidity measures and bought more government bonds as President Jean-Claude Trichet pledged to fight “acute” financial market tensions.
Under pressure from investors to lead the charge against the spreading sovereign debt crisis, Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. As he spoke, ECB staff embarked upon a new wave of purchases, triggering a surge in Irish and Portuguese bonds.
“Uncertainty is elevated,” Trichet told reporters after the ECB’s Governing Council left its benchmark interest rate at 1 percent today. “We have tensions and we have to take them into account.”
While the ECB chose not to deploy new crisis-fighting tools, Trichet managed to avoid sparking another market selloff four days after traders gave a vote of no-confidence to a bailout of Ireland. He kept up pressure on governments to fight the crisis by saying that “benign neglect” is not enough and indicated they could expand Europe’s rescue fund amid concern it’s not large enough to finance any bailout of Spain.
“The ECB is doing what it can up to its limits,” said Nick Kounis, chief euro-region economist at ABN Amro NV in Amsterdam. “The ball is back in the court of governments to take bold action.”
The yield on Portuguese 10-year bonds dropped 50 basis points to 6.13 percent and Irish yields fell 37 basis points to 8.76 percent. The Spanish 10-year yield declined 22 basis points to 5.07 percent. The euro traded at $1.3228 at 5:41 p.m. in London compared with $1.3152 before Trichet started talking.
The ECB will keep offering banks unlimited loans through the first quarter over periods of seven days, one month and three months. That marks a shift from last month, when Trichet said that the ECB could start limiting access to its funds.
Signaling disagreement within the 22-member council, Trichet said an “overwhelming majority” of officials backed the ECB’s Securities Market Program and that a “consensus” supported maintaining the status quo on providing liquidity. Bond purchases will continue to be offset to keep the money supply unchanged, in contrast to the Federal Reserve and the Bank of England, he said.
“It’s not quantitative easing, we’re withdrawing all the liquidity,” he said.
Some strategists said the ECB’s refusal to follow the Fed and the Bank of England may soon end the rebound in bonds.
“The compression in spreads could prove temporary as Trichet has stressed that the SMP is not QE,” said Matteo Regesta, a fixed-income strategist at BNP Paribas SA in London. “In the scenario where SMP eventually increases to a meaningful size, weekly full sterilization of the stock will become a non- trivial task. The only way to avoid such a jam is to keep the program at a low scale.”
The ECB is facing calls to devise new crisis measures amid concern that contagion from the region’s debt crisis will soon engulf Spain. Trichet, who has said new European Union fiscal rules are too weak, signaled that the ECB is already doing its bit and the onus is now on governments.
“They are learning that benign neglect cannot be practiced in this domain,” said Trichet in an interview with Bloomberg Television. Asked whether the euro region’s 750 billion-euro ($992 billion) rescue package should be expanded, he said that “this facility has to be commensurate with the difficulty of the time.”
Trichet has changed tacked before. Earlier this year, he initially resisted demands to temper the Greek budget crisis only to tear up the ECB’s rule book by buying bonds in May in a decision which also split the council.
The ECB may have been reluctant to go even further to support Spain, Greece, Ireland and Portugal for fear of being viewed as a bailout tool for politicians, damaging its independence. Bundesbank President Axel Weber, a leading contender to replace Trichet at the bank’s helm next year, opposed the decision to start buying bonds in May and has since called for the program to be cancelled. He says it poses “stability risks” and that there is no evidence it works.
Weber, who spoke at a separate event in Frankfurt today, said he had nothing to add to Trichet’s remarks.
The ECB has already stepped up its activity, last week buying the most bonds in two months. Overall purchases nevertheless total 67 billion euros so far, well below the amounts bought by the Bank of England and the Fed.
The ECB left unchanged its forecast for economic growth next year at about 1.4 percent, while raising its estimate for inflation to about 1.8 percent from 1.7 percent. Releasing its 2012 outlook for the first time, it predicted growth of 1.7 percent and inflation of 1.5 percent.
To contact the editor on this story: John Fraher in London at firstname.lastname@example.org