THE EUROPEAN Central Bank (ECB) has broken a three-week abstention from government bond market purchases, revealing it settled deals worth €432 million last week. But it did not dispel a view that its interventions were becoming reluctant.
The ECB’s announcement yesterday appeared to confirm traders’ reports it had bought Portuguese bonds on March 18th in deals which would have been settled last week.
Since then, however, the ECB has not been spotted intervening in euro zone bond markets, despite the collapse of Portugal’s government and soaring borrowing costs faced by the country.
Portugal’s borrowing costs yesterday rose to euro-era highs across all bond maturities and the extra cost Portugal pays for lending over Germany also hit a record since the launch of the monetary union in January 1999.
Portuguese 10-year bond yields rose to 7.92 per cent, nearly a quarter of a percentage point higher on the day, while the extra cost for the country to borrow over Germany rose to 463 basis points.
The ECB is showing signs of executing a gradual change in strategy. The bond-buying programme was launched in May, when the euro zone crisis was at its most intense.
In the first week, the ECB spent €16.5 billion.
Subsequently, the programme was steadily run down with much smaller-scale interventions, apart from a pick-up in December.
In recent weeks, however, the ECB has shown a renewed determination that euro zone politicians should take further action themselves to beef up euro zone governance and restore investor confidence in fiscal policies or banking systems.
Earlier this month it suffered a setback when it failed to persuade politicians to give bond-buying powers in the open market to the European Union’s new rescue funds, a move which would have allowed the ECB to close down its programme. That move may have made the ECB even less prepared to act.
“The ECB is going to be a less willing buyer and is going to require more challenging circumstances if it is to intervene,” said Julian Callow, European economist at Barclays Capital.
So far the ECB has acquired €76.5 billion of bonds, taking account of €1 billion in maturities last week.
With a bail-out for Portugal looking more likely, investors and strategists said it would make little sense for the ECB to buy any more Portuguese bonds – unless tensions grew in other countries’ debt markets. – Copyright the Financial Times Limited 2011
