Bank of England remains on hold, as expected, amid growth worries
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Jean-Claude Trichet indicated Thursday that the European Central Bank has resumed purchases of government bonds amid fears the euro-zone’s sovereign debt crisis could engulf Italy and Spain, while also boosting liquidity in money markets amid signs of strain in bank funding markets.
The ECB president told reporters that the bank’s government bond-buying program had ever been “dormant” and that he wouldn’t be surprised to see a move in bond markets before the end of his news conference. The ECB has conducted no bond purchases through its Securities Market Program, or SMP, since March.
“As regards the SMP, the SMP is fully transparent, so you will see what we do,” Trichet said. “I never said that the SMP had been interrupted ... and again, you will see what we will do. Again, you will see what we do.”
As Trichet spoke, Italian and Spanish bond yields, and yields of peripheral euro-zone government bonds, fell sharply. The 10-year Italian yield IT:10YR_ITA +1.44% was down 2 basis points in recent action at 5.95% after dropping as low as 5.82%, according to FactSet Research data.
The 10-year Spanish yield ES:10YR_ESP +0.66% remained down around 8 basis points at 6.15%.
The added liquidity measures and a less hawkish tone on the monetary policy outlook served to undercut the euro EURUSD -1.25% , which sank 1.6% versus the dollar to trade at $1.4125.
Soaring yields in recent weeks have underscored worries that either or both countries could eventually be forced out of credit markets. The euro-zone’s rescue mechanism is widely seen as inadequate to handle a bailout of Italy, the region’s third-largest economy, or Spain the fourth-largest.
Asked to comment on reports that the ECB had bought only Portuguese and Irish debt rather than any Italian or Spanish paper, Trichet refused to elaborate.
If the ECB has bought debt only in those markets “then it might be interpreted as more of a warning shot rather than a broad-based onslaught,” said Julian Callow, economist at Barclays Capital in London.
Earlier, the ECB announced it had left its key lending rate unchanged at 1.5%, as expected,
Soaring borrowing costs for Italy and Spain have put European leaders under pressure to act. Italy and Spain are seen as too big to bail out with the euro-zone’s current rescue facilities.
A July agreement by euro-zone leaders to provide a second bailout to Greece and to revamp the region’s rescue fund have provided little comfort amid a lack of details regarding how the European Financial Stability Facility can be employed to shore up troubled sovereigns.
Trichet also announced that the ECB was expanding its liquidity-providing programs, reintroducing a six-month long-term refinancing operation that had been put in place at the height of the financial crisis.
The bond-buying hints and the liquidity measures show the ECB is back in “crisis mode,” said Carsten Brzeski, senior euro-zone economist at ING Bank.
While still vowing the Governing Council would “monitor very closely” inflation developments in the euro zone, Trichet noted that risks to the economic outlook, while balanced, had seen an intensification of downside risks.
