THE EUROPEAN Central Bank was reported yesterday to be buying Irish government debt in an effort to halt a marked slide in its price over the course of the week. According to Bloomberg News, market traders witnessed the transactions.
The sell-off of government bonds was halted yesterday and fresh short-term debt was issued by the National Treasury Management Agency.
The purchase of government bonds by the ECB was one of the emergency measures introduced in early May to stem the eurozone debt crisis, which culminated in the bailing out of Greece. Such measures are highly unorthodox and have caused open divisions among the 16-member bloc’s central bankers.
Shortly before the May 7th rescue package was announced, Axel Weber, the head of Germany’s central bank and widely tipped to be the next ECB head, stated he opposed the buying of government bonds.
The ECB does not give details of its interventions, but it had been thought that it was stepping back from further purchases after the initial buy-up in May.
Market sentiment has been fragile despite the unprecedented package of measures in May. Holders of Irish government debt appeared to have taken fright at the news earlier in the week that the costs of preventing the collapse of Anglo Irish Bank had risen again to over €24 billion.
The sell-off of government bonds affected other weaker eurozone economies, too, though to a lesser extent than Ireland. Less optimistic forecasts for recovery in the US and UK by both countries’ respective central banks on Tuesday and Wednesday seem to have shaken investors. The price of both Portuguese and Spanish government bonds fell during the week. Portuguese bonds stabilised yesterday, but those of Spain continued to fall on concerns about whether it can meet its budget targets.
After Greek government debt, Ireland’s was judged riskiest by the bond market.
The governor of the Central Bank, Patrick Honohan, told the Daily Telegraphyesterday that the premium paid to hold Irish government debt was "ridiculous" and was not a true reflection of the country's fiscal credibility.
Yesterday’s news that the bailed- out Greek economy had shrunk by more than expected in the second quarter is likely to prolong the current period of bond investor fear.