Skip to main content

Addressing the continuing turmoil in euro zone debt markets, European Central Bank President Jean-Claude Trichet said the bank will offer loans to the neediest banks as long as necessary to stabilize the continent's financial system.

The emergency measures will continue "with the full allotment as long as needed," at least until April 12, Mr. Trichet said, noting that "uncertainty was elevated" in Europe's credit markets.

The move is something of a reversal for the ECB. A month ago, Mr. Trichet hinted strongly that the banks' massive emergency lifelines were not open-ended and would be wound down early in the new year.

Story continues below advertisement

Thursday's announcement provided some much-needed confidence that Europe's fiscal woes will be backstopped by the central bank. In recent weeks, bonds of Ireland, Portugal, Spain and some other countries plummeted as investors worried about the ability of governments to stem massive deficits and pare down soaring debt levels.

Bond prices turned higher Thursday as traders reported the ECB was buying Portuguese bonds even as Mr. Trichet was holding his Frankfurt press conference. The purchases - neither confirmed nor denied by the ECB - combined with the extended bank-loan program, pushed down yields on Portuguese bonds sharply. The yield on the 10-year bonds fell 55 basis points (100 basis points equal one percentage point) to 5.85 per cent. Yields on Irish bonds fell 35 basis points to 8.31 per cent.

Still, Mr. Trichet himself gave no hint that he would ramp up the ECB's sovereign bond purchase program in an effort to keep the debt crisis from spreading further than Greece and Ireland - the first two bailout victims - to other weak countries such as Portugal, Spain and perhaps even Italy.

Some investors and economists were disappointed by the middling response to the distressed bond markets in the "peripheral" euro zone countries. A few had expected a major plan - ramping up the bond-purchase program to €1-trillion ($1.32-trillion) or so - in a big-bang effort to drop bond yields significantly and perhaps punish short sellers along the way.

Instead, Mr. Trichet merely confirmed that the bond purchase program (formally known as the Securities Market Program, or SMP) was continuing and would be "commensurate" with what is required to stabilize the sovereign bond market. Some economists think he is merely holding back firepower until it is needed, if it is needed. "We continue to look for €100-billion purchase by the beginning of next year, including Spanish securities," RBS economist Jacques Cailloux wrote in a note.

Strategist Elisabeth Afseth, of London's Evolution Securities, said the program could be boosted to €1-trillion, even double that.

On Monday, the ECB said it had bought €1.3-billion of peripheral bonds last week, the largest amount since September. That brings the total to about €67-billion since the bond purchase program was announced in May, when Greece was on the verge of collapse and accepted a €110-billion bailout package from the European Union and the International Monetary Fund.

Story continues below advertisement

Spain had some good news on the bond front too. On Thursday morning, it managed to sell €2.5-billion of three-year bonds. Investor interest was high, indicating that confidence in Spanish debt had not entirely evaporated. The bad news was that investors demanded a yield of 3.72 per cent, well above the 2.53 per cent they accepted only two months ago, just before Ireland's debt implosion.

The ECB's relatively measured bond purchases may have been in part politically motivated. Axel Weber, the head of the German central bank, has opposed the purchases since they started in May. He has said buying bonds blurs the line between fiscal and monetary policy, and has questioned whether the program is effective. His strong views mean that an enormous, U.S.-style quantitative easing program is all but impossible in the euro zone.

Mr. Trichet's unwillingness to boost bond purchases may suggest that he believes the austerity programs are beginning to work, and that governments, not central bankers, can be relied on to do the heavy lifting from now on.

All euro zone governments must meet their 2011 fiscal targets, he warned, even if that means additional austerity measures. He noted that the measures are making progress. The euro zone's budget deficit is expected to be 4.6 per cent next year, about half the forecast deficit in the United States and Japan, he said.

With Portuguese and Spanish bond yields falling, investors are weighing whether the euro zone's debt crisis is waning or merely taking a brief respite before a renewed bond attack. Wilfried Verstraete, chairman of Euler Hermes Group of Paris, the world's largest trade credit insurer, said that the willingness of the ECB and Germany to back Europe's weaker siblings isn't open-ended. "As long as Germany continues to stand behind the others, we are not in a real crisis," he said in an interview.

But "that might change in the future," he warned, if taxpayers grow tired of paying for the mistakes of commercial banks and countries that lived beyond their means.

Story continues below advertisement

With files from reporter Barrie McKenna in Ottawa

Report an error Licensing Options
About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

Comments are closed

We have closed comments on this story for legal reasons. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.