ECB Resumes Bond Buying as Trichet Offers Banks Cash to Stem Debt Crisis
European Central Bank President Jean- Claude Trichet said the ECB has resumed bond purchases and will offer banks more cash to stop the region’s debt crisis from engulfing Italy and Spain and hurting the economy.
“I wouldn’t be surprised that before the end of this teleconference you would see something on the market,” Trichet told reporters in Frankfurt today after the ECB kept its benchmark interest rate at 1.5 percent. “We were not unanimous but with overwhelming majority with regards to the bond purchases.”
ECB purchases of Irish and Portuguese bonds during the press briefing haven’t stamped out investor concern on the 21- month crisis spreading to Italy and Spain, whose yields soared to euro-era highs this week. European officials are trying to put a firewall around Europe’s third and fourth-largest economies to avoid them being forced into seeking external aid.
“With the ECB not daring to touch Italy and Spain and the decision to buy Portugal and Ireland also not taken unanimously, the market looks set to question the ECB’s resolve until it sees the facts,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “To be fair, the decision to buy Italy and Spain should not be taken light- heartedly as it could open a bottomless pit.”
Italian and Spanish 10-year bonds declined, pushing the yields as high as 6.23 percent and 6.33 percent respectively. Irish and Portuguese bonds rose as people with knowledge of today’s transactions said the ECB bought those securities after being absent from the market for 18 weeks. That debt was at 10.4 percent and 11.3 percent as of 5 p.m. in London.
The euro slipped after Trichet’s comments, falling to $1.4161 at 6:37 p.m. in Frankfurt from $1.4202 at the start of the press conference.
Market fallout from the debt crisis in Europe, the political standoff on the U.S. government’s borrowing limit and concern about slower global growth prompted central banks around the world to take action this week to protect their economies.
Yesterday, the Swiss central bank unexpectedly cut interest rates and said it will take steps to stem the franc’s record- breaking gains against the euro and the dollar. Today, Japan sold yen to halt an appreciation, while Turkey’s central bank reduced its key rate to a record low of 5.75 percent. The Bank of England kept its key rate at 0.5 percent.
No Time to Wait
European leaders last month agreed on a second bailout package for Greece that includes voluntary contributions from private-sector bondholders and widens the scope of the European rescue fund. Governments must still ratify the plan, which would empower the European Financial Stability Facility to start buying debt on the secondary market.
“The objective of stabilizing markets cannot wait until parliaments have passed new legislation on the EFSF,” said Paul Mortimer-Lee, global head of market economics at BNP Paribas SA in London. “The benefit of the reengagement will be tempered if the ECB only follows the ‘acupuncture’ approach to relieving pressure on Italy and Spain by buying other markets but not these two.”
The EFSF “should be operational in our view as soon as possible,” Trichet said. “What we expect is that the EFSF will be effective and efficient in its interventions, which would permit us not to intervene to restore” the monetary policy transmission channel.
Earlier, European Commission President Jose Barroso sought more firepower for the euro region’s 440 billion-euro ($623 billion) rescue fund. “Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis,” he told European leaders in a letter released in Brussels today.
Morgan Stanley analysts said yesterday that southern European bank bond sales have been “very thin” for the past two months and short-term money markets are closed to some banks looking for funding for longer than 30 days.
We “are increasingly concerned that funding markets won’t reopen with sufficient depth or at good enough terms for Italian and Spanish issuers,” the analysts said.
The 23-member Governing Council decided today to extend unlimited allotment in its refinancing operations through the end of the year and offer banks as much money as they need in a six-month tender, an operation the ECB last used after Greece’s first bailout program was announced in May last year.
The six-month tender “aims at addressing recent market tensions, while still leaving room for the ECB to continue its rate normalization path in coming months,” said Giada Giani, an economist at Citigroup Inc. in London. She still predicts a quarter-point rate increase in October.
Trichet indicated the ECB is reluctant to shelve further rate increases even as investors reduce bets on the central bank adding to its two rate moves in 2011 and economists push back forecasts for higher borrowing costs.
ECB rates are still “accommodative” and inflation risks “remain on the upside,” Trichet said. “We will continue to monitor very closely all developments,” he added, employing a phrase policy makers have used in the past to signal a rate increase within two to three months.
Euro-area inflation, which the ECB aims to keep just below 2 percent, slowed to 2.5 percent last month from 2.7 percent in June, driven by a sharp drop in Italy’s rate. The ECB forecasts annual consumer-price gains to average 2.6 percent this year.
Trichet acknowledged a “particularly high” level of uncertainty about the economic outlook. While “continued moderate expansion is expected” in the coming months, “downside risks may have intensified,” he said.
Wait and See
European services and manufacturing growth weakened in July to the slowest pace since the euro region emerged from recession two years ago. The ECB in June revised down its 2012 growth forecast to 1.7 percent from 1.8 percent.
“Weaker economic growth, the intensifying sovereign-debt crisis, and better than expected inflation numbers suggest that the case for the ECB to move into ‘wait-and-see mode’ has strengthened,” said Nick Kounis, head of macro research at ABN Amro NV in Amsterdam, who before today’s press conference had forecast the ECB to raise interest rates again in October.
“We expect the central bank to keep interest rates on hold for the rest of the year before a resumption of rate hikes in July of next year,” he said.
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