THE EUROPEAN Central Bank launched its most aggressive intervention in government bond markets for seven months after Jean-Claude Trichet, president, unveiled a determined – but carefully calibrated – response to the euro zone crisis.
Traders said the ECB was on Thursday buying Portuguese and Irish bonds in €100m tranches – four times bigger than previously. The moves sharply brought down the cost of borrowing for Lisbon and Dublin and sparked a euro rally.
Addressing a press conference in Frankfurt, Mr Trichet stopped short of an explicit announcement that the euro’s monetary guardian was escalating its actions to restore investor confidence in the euro zone. Instead, he stressed the responsibility of euro zone governments to win back confidence in their public finances – indicating that they should be prepared if necessary to increase the size of the European Union’s rescue funds.
But the ECB president acknowledged market tensions were “acute” and confirmed there would be no limit to the size of the bond-buying programme. Hinting at a strategy that would rely more on the element of surprise, Mr Trichet said that the ECB’s intervention in bond markets would be “commensurate” with the malfunctioning of markets.
Its action was “more tactical than concerted intervention”, said Julian Callow, European economist at Barclays Capital.
The ECB governing council also confirmed it would delay until at least April the next stage in its “exit strategy” to unwind the exceptional liquidity support it has been providing to banks since the collapse of Lehman in September 2008.
The ECB launched its bond-purchasing programme in May, when the euro zone crisis was at its most intense. After heavy use initially, the amounts bought fell sharply in subsequent weeks and Axel Weber, Germany’s Bundesbank president, called for it to be curbed.
After Thursday’s buying spree, yields on 10-year Portuguese benchmark bonds fell by more than half a percentage point to 5.82 per cent, while Irish yields fell by more than a quarter point to 8.30 per cent.
With purchases apparently focused on creating a firewall between Portugal and Ireland and other euro zone countries, traders said that the ECB had not bought Spanish bonds – which would have required a big expansion of its programme because of the size of Spain’s debt market. Some traders were disappointed that the ECB had not embarked on US-style “quantitative easing”.
– (Copyright The Financial Times Limited 2010)
