Aug. 15 (Bloomberg) -- The European Central Bank spent a record amount on government bonds last week as it began buying Italian and Spanish securities to contain the debt crisis.
The Frankfurt-based ECB said today it settled purchases worth 22 billion euros ($31.7 billion) in the week through Aug. 12, more than the 15 billion-euro median estimate in a Bloomberg News survey of 19 economists and strategists. That also surpasses the 16.5 billion euros the ECB spent during the first week of its initial foray into Greek markets in May last year.
“The market optimists will interpret this number as good news as it underscores the ECB’s resolve,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “Equally, the pessimists will point out that it is bad news as it shows how much money the ECB had to commit for the yield compression seen.”
The ECB was forced to start buying Italian and Spanish bonds on Aug. 8 after politicians failed to convince investors they could contain the debt crisis. Ten-year yields in both countries, which had soared to euro-era highs, last week dropped by more than 100 basis points to about 5 percent.
The ECB will take seven-day term deposits from banks tomorrow to absorb the 96 billion euros of liquidity created since its bond program started on May 10 last year, a practice it employs to ensure the purchases don’t fuel inflation.
The difficulty for the ECB is the more it buys, the harder it may become to “sterilize” the purchases, said Nick Kounis, head of macro research at ABN Amro in Amsterdam.
“Mopping up liquidity from a growing stock of purchases is going to be increasingly difficult,” he said. “There are still question marks over whether they can sustain this.”
ECB policy makers are divided over the bond-purchase program, which when introduced last year was intended as a temporary measure while governments prepared a response to the burgeoning debt crisis. Germany’s Bundesbank opposed the program when it was started and was also against using it last week.
The 22 billion euros spent “strikes a good balance,” said Christian Schulz, senior economist at Joh. Berenberg Gossler & Co. in London. “It impresses the market but it’s not an amount that will cause lots of frowns in the Governing Council or among taxpayers. If there aren’t any major ups and downs, the ECB will be able to spend less in the coming weeks.”
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