Monday

5th Dec 2022

Mixed support for ECB bond purchases

  • Jean-Claude Trichet looks out the window of a Frankfurt office (Photo: ECB)

A decision by the European Central Bank to purchase government bonds for the first time has drawn a mixed reaction from analysts, while an EU announcement to set up a massive support mechanism for struggling governments has led to a strong rally in financial markets.

In the early hours of Monday morning (10 May), EU finance ministers meeting in Brussels reached an agreement on a €500 billion "European Financial Stabilisation mechanism," quickly followed by a statement from the ECB saying it would make its first foray into buying government debt, a process known as quantitative easing.

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European stocks surged during morning and early afternoon trading with the Eurofirst 300 up 6.3 percent. Government bonds in peripheral eurozone countries, previously identified by market players as being vulnerable, also staged a strong comeback.

ECB intervention as part of the co-ordinated European effort to put an end to recent eurozone turmoil has been broadly welcomed, although question marks have been raised over the bank's jealously-guarded independence.

In a statement to the press, the ECB's governing council justified its latest move, saying it had taken note of the statement of euro area governments to "take all measures needed to meet [their] fiscal targets this year and the years ahead in line with excessive deficit procedures."

The bank also said that the purchasing operation would be sterilized by withdrawing liquidity elsewhere, in order to avoid the creation of new inflationary pressures.

Under the EU treaties, the bank is prevented from mirroring recent US and UK central bank actions in buying debt directly from governments, but is allowed to do so on the secondary market. Germany's central bank, the Bundesbank, has already begun buying European government bonds, a spokesman told AFP on Monday.

Deutsche Bank chief international economist, Stefan Schneider, said the move was justified and was unlikely to lead to longer-term rises in inflation above two percent, the ECB's stated threshold.

"I would be surprised if inflation expectations budged," he told EUobserver.

He conceded that the perception of the bank's independence could be eroded, however. "Obviously the independence will be questioned more than a week ago, but ultimately this action is not to bail-out governments, it is to keep the debt market functioning," he said.

The central bank has also been quick to stress that it does not wish to provide monetary financing of excessive fiscal deficits, but the decision still marks a dramatic about turn, with ECB president Jean-Claude Trichet saying only last Thursday that the governing board had not discussed the purchase of government bonds.

The move follows rumours last week that banks were becoming increasingly dubious about whether to make further purchases of debt from peripheral eurozone states, raising the prospect of ever-higher borrowing costs or of a country failing to find enough buyers during future bond issuances.

Markets have concentrated on 19 May when Athens is due to roll over roughly €8.5 billion in bonds as a crucial date in the country's debt calendar.

Deadline's for other countries are also looming however, with Spain needing to refinance €81 billion of debt by the end of this year, and Portugal €19 billion.

The ECB said it would also re-start dollar lending operations and bring back some of the emergency liquidity measures it had started to phase out.

ECB says more rate hikes to come

European Central Bank president Christine Lagarde said more rate hikes will come, but also admitted a recession will not lower inflation — leaving some economist question the logic of the policy.

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