The European Central Bank, which has spent more than 1 trillion euros ($1.26 trillion) to cap surging borrowing costs in nations such as Spain and Italy, is saying it can do little more to halt the crisis until governments act.
“On the one hand we have the ECB, and then we have euro-zone governments,” said Michael Leister, a rates strategist at DZ Bank AG in Frankfurt. “The ECB is really reluctant to do anything. It would be very difficult for the ECB to justify another intervention if politicians don’t deliver.”
Governments need to take “a brave leap” to ensure closer integration, without which the central bank can only offer temporary solutions, according to ECB President Mario Draghi. Politicians such as Spanish Prime Minister Mariano Rajoy say the central bank should implement additional measures including boosting bond purchases to bring down borrowing costs.
The European debt crisis, now in its third year, is threatening to bring the world economy to a halt. Greek February 2023 bonds have slumped, pushing yields back over 30 percent today, as speculation builds that the nation will withdraw from the euro. German 10-year bund yields dropped to a record yesterday as a contraction in European manufacturing and services spurred demand for the region’s safest securities.
While additional support from the ECB may help to bring down yields in so-called peripheral nations, Europe requires tighter economic cooperation to avoid the threat of renewed debt market turmoil, according to Richard McGuire, a senior fixed-income strategist at Rabobank International in London.
“Whether it’s bilateral loans for Greece or ECB purchases of bonds in the secondary market or bailouts sponsored by the European Financial Stability Facility - these are all a pooling of debt risk but never enough to placate the market for long,” McGuire said. “The measure itself is never enough - it is only a small step towards that ultimate end goal, fiscal unity.”
Europe needs to take a leap toward greater political integration to convince investors about the future of monetary union, Draghi said yesterday in a speech in Rome.
“The non-standard measures implemented by the ECB helped us gain time,” he said. “But we have now reached a point where the process of European integration needs a brave leap of political imagination.”
ECB Governing Board member Jens Weidmann said policy makers have “reached the limit of our mandate particularly” with unconventional measures, according to an interview published in Le Monde newspaper today. “Governments must take responsibility and not subcontract to monetary policy,” he said.
The ECB provided loans to cap borrowing costs in two so-called longer-term refinancing operations in December and February. Italy’s 10-year bond yield dropped to 4.68 percent on March 9, down from a euro-era high of 7.48 percent on Nov. 9. Similar-maturity Spanish yields fell to 4.83 percent on March 1, from 6.78 percent in November.
The ECB has since halted its bond-purchase program even as yields have rebounded. The central bank said on May 21 it hadn’t bought any government debt for a 10th week.
Italy’s 10-year yields have climbed 67 basis points since March 12, when the central bank last reported settling purchases, to 5.58 percent as of 1:01 p.m. London time. The yield on Spanish debt has risen 115 basis points, or 1.15 percentage point, to 6.21 percent.
Rajoy left a summit of European Union leaders in Brussels early yesterday calling on the ECB to act to bring down rising borrowing costs in some of the 17 euro countries. Greek, Irish, Spanish and Italian bonds are the worst performing of 26 sovereign debt markets this quarter tracked by Bloomberg and the European Federation of Financial Analysts Societies.
‘We Have a Problem’
“If public debt isn’t sustainable, we have a problem,” Rajoy said. “I insist it is up to the ECB to take this decision that it has already taken in the past.”
Rajoy spoke after leaders clashed in Brussels over the possibility of joint debt sales, failing to smooth differences between the leaders of Germany and France on the adoption of so-called euro bonds.
A majority of leaders backed the bonds, and Italy can help persuade Germany to support Europe’s “common good” as well, Italian Prime Minister Mario Monti said yesterday. His account contrasted with that of Luxembourg Prime Minister Jean-Claude Juncker, who told reporters that joint debt sales “didn’t find much support.”
Politics take time that the bond market doesn’t always allow for, according to Niels From, chief analyst at Nordea Bank in Copenhagen.
“It’s one thing that leaders might make some decisions, but it’s another thing for them to implement them,” he said in an interview. “The process has shown to be very slow, so the prospects are higher for the ECB coming back into the market to stabilize it.”
The central bank should cut its benchmark rate by half a percentage point from its current 1 percent and start a new, pre-announced program of buying sovereign debt from all 17 euro nations, as well as extending further loans to the region’s banks, according to Soeren Moerch, head of government bond trading at Danske Bank in Copenhagen.
“It takes too long for governments to act,” he said. “Eurobonds in practice will take at least a year and that’s if they’re fast-tracked. With all the legal preparations it will probably take three. Quantitative easing, en masse, that’s what the ECB should do and the ECB is the only institution that could do it.”
Euribor futures climbed for the four days through May 24, indicating investors were adding to bets for lower interest rates. The implied yield on the contract expiring in December declined to 0.57 percent from 0.67 percent over the period. The central bank’s governing council next meets on June 6.
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