CH: ECB bond buy freeze remained ahead of EU summit
FRANKFURT (Reuters) - The European Central Bank extended a shut down of its government bond purchase program to a fourth month last week, a freeze the bank hopes can be made permanent by handing the controversial role over to the euro zone's bailout fund.
The ECB has barely used its Securities Markets Programme this year despite a severe intensification of the debt crisis which has now seen Spain and Cyprus become the fourth and fifth of the euro zone's 17 countries to require bailouts.
Last week's lack of purchases keeps the program's total at 210.5 billion euros. As usual it will take interest-paying deposits from banks on Tuesday to counterbalance the buys. It will also publish its quarterly re-assessment of the program's value on Tuesday.
Focus is back on the central bank and its ability to calm the crisis following last week's deal by the euro zone's leaders to allow the region's bailout fund to directly inject aid into banks, scrap its bond market seniority and have the ECB play a major role in supervising banks.
ECB policymakers hold their monthly policy meeting on Thursday. With the euro zone economy faltering they are expected to cut interest rates to a new record low of 0.75 percent but any hints of other support could be crucial.
Key is whether it is prepared to restart its purchases of troubled euro zone bonds, or would consider giving the ESM bailout fund access to its ultra-cheap loans, a move that would boost the ESM's firepower beyond reach of market speculation.
The borrowing costs of Italy, Spain and other debt-hobbled countries - with the exception of Portugal - have dropped sharply since the leaders' deal in Brussels at the end of last week. Market watchers are now waiting to see whether the ECB will provide the final piece of the jigsaw. (for data click)
RESISTANCE
The ECB introduced the SMP back in May 2010 when Greece's problems first came to a head.
Under the programme, it and the 17 euro zone national central banks buy government bonds on the secondary market from banks and other bond holders, a deliberate tactic that allows it to avoid claims it is directly financing governments.
Cut off for purchases tends to be Thursday each week, meaning that when the ECB is buying, the total may not capture any buying done towards the end of the week.
The ECB also does not give a country-by-country breakdown of its purchases, but euro zone sources say it has spent about 40 billion euros on Greek debt and concentrated on Italian and Spanish debt with the 140 billion euros spent since August.
Critics warn the ECB's programme treads dangerously close to the ultimate ECB-taboo of financing governments, but many economists believe unrestricted purchases by the bank may be the only way to control the debt crisis in the short term.
The central bank, which saw two of its top German policymakers quit over its purchases last year, has reiterated its resistance.
"We do not consider that the SMP would be the best instrument to use at the current juncture," ECB Executive Board member Benoit Coeure said late last month.
Having been stung by Italy and others reneging on fiscal repair promises when the ECB restarted its bond purchases in the past, the bank appears to have adopted a harder approach now by allowing market pressure to build.
The progress seen last week shows the tougher stance is clearly yielding results. More serious talk about closer political and fiscal integration has also been complemented with deals to shore up ailing banks in both Greece and Spain.
