Jean-Claude Trichet is keeping the onus on governments to fix the debt crisis as the European Central Bank buys bonds to win politicians time to cut deficits.
Warning European Union leaders that they can’t rely on “benign neglect” to quell market turmoil, Trichet, the ECB’s president, is deploying a two-pronged strategy to ease roiled markets. The bank snapped up Portuguese and Irish bonds again today after Trichet yesterday assured investors that policy makers will delay the withdrawal of emergency liquidity.
The ECB wants governments to take the lead in quelling the turmoil that threatens to spread to Spain from Ireland and Greece. With Trichet yesterday stopping short of announcing more powerful measures, the risk is that the crisis may be drawn out and the ECB will have to do more if politicians don’t deliver. Trichet meets French President Nicolas Sarkozy later today.
“Trichet doesn’t see a quick and easy fix,” said Axel Merk, president and chief investment officer of Merk Investments LLC in Paolo Alto, California. “The ECB is most reluctant to intervene too heavily in the markets as that would take the pressure off policy makers to follow through with reform.”
The ECB’s purchases, which were stepped up during Trichet’s press conference in Frankfurt yesterday, have triggered a surge in bonds across the euro region’s periphery.
The extra yield that investors demand to hold Portuguese 10-year bonds over German bunds today fell below 300 basis points for the first time since August. Irish yields dropped 28 basis points to 8.51 percent after falling 38 basis points yesterday.
The Spanish 10-year yield, which jumped to a euro-era record of 5.67 percent on Nov. 30, was at 4.59 percent at 10:41 a.m. in London. The euro rose 0.4 percent to $1.3265 today.
While Luigi Speranza, an economist at BNP Paribas SA in London, said that the ECB again did the “bare minimum” and may fail to calm markets, Gilles Moec of Deutsche Bank says the ECB is keeping “some powder dry.”
“The message is that investors positioning themselves for further tension on peripheral yields do so at their own risk,” said Moec.
The ECB’s Governing Council convened to set monetary policy as investors debate whether politicians have the resolve or the remedies to stop the crisis after Ireland’s Nov. 28 bailout failed to placate markets.
Trichet went some way to providing relief by saying the ECB will keep offering banks as much funds as they want at a fixed interest rate for seven days, one month and three months through the first quarter. The move marked a policy shift from November, when Trichet indicated the ECB would tighten access to cash.
“Uncertainty is elevated,” Trichet said after the ECB left its benchmark interest rate at 1 percent. “We have tensions and we have to take them into account.”
Trichet nevertheless refused to say whether the ECB will boost or broaden its bond purchases and said the central bank will keep sterilizing them, unlike similar programs at the Federal Reserve and Bank of England.
The refusal to be more aggressive reflects a belief at the ECB that Europe’s debt woes can only be solved by governments embracing austerity and that providing more liquidity would only delay the day of reckoning, said Peter Dixon, an economist at Commerzbank AG in London.
“The ECB is effectively putting a sticking plaster over many of the problems in order to ensure that markets continue to function, but this requires governments to sit down and think much more clearly,” said Dixon. “Ultimately the problems we face are for governments to solve, not central banks.”
Economists say the EU’s options include boosting the 750 billion-euro ($992 billion) temporary rescue fund or turning it into an asset-buying program, cutting interest rates on bailout loans or issuing joint bonds for the 16 euro nations.
Trichet, who said at a conference in Paris today that Europe needs a “quasi” fiscal union, is due to meet Sarkozy in the French capital at 5:15 p.m. to discuss the “situation in the euro zone.”
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 next year, opposed the decision to start buying bonds in May and has since called for the program to be canceled. He says it poses “stability risks” and that there is no evidence it works.
In a sign the ECB’s 22-member Governing Council remains divided, Trichet said the bond plan had only enjoyed the support of an “overwhelming majority” and the extension of liquidity measures had been endorsed by “consensus.” Weber, who spoke at a separate event in Frankfurt yesterday, 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.
With the ECB dipping into markets, Trichet signaled that EU governments could increase their bailout fund set up earlier this year.
Asked about the size of the cash pool in Paris today, Trichet said that “everything they do needs to be commensurate to dimension of the challenges.”
“This is true in all domains, qualitative as well as quantitative,” he said. “They must go as far as possible and be as effective as possible.”
The risk is that Trichet’s pleas fall on deaf ears, with governments indicating they have “not reached the place yet where they’re thinking about bold action,” said Nick Kounis, chief euro-region economist at ABN Amro NV in Amsterdam.
“There is every danger that the crisis will become more acute,” he said.