Analysis: Bid to quell market anxiety is only leading to confusion
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Thursday’s round of bond purchases by the European Central Bank are going down as a textbook example of how not to conduct intervention.
ECB President Jean-Claude Trichet, in a move that seemed time for maximum impact, told reporters in the middle of his globally televised, monthly news conference that bond purchases could be made soon, possibly even before the end of the press conference.
Sure enough, traders reported that the ECB was in the market. But it soon became clear, they said, that the ECB was buying Portuguese and Irish debt rather than Italian or Spanish bonds.
Italian and Spanish bond yields temporarily dipped, but soon rebounded.
Strategists said a further round of purchases appeared to be under way on Friday, with somewhat better results this time.
The 10-year Spanish bond yield ES:10YR_ESP -3.66% fell 24 basis points, according to FactSet Research data, dipping below the 6% level to 5.97%. The 10-year Italian yield IT:10YR_ITA -1.26% was little changed, however, at 6.11%.
Credit markets appear to be moving in a familiar vicious circle, analysts say, with investors dumping Italian and Spanish bond amid fears of default. Rising yields mean rising borrowing costs, which in turn, increase the risk of default.
The ECB’s strategy appears “incomprehensible,” said Tobias Blattner, strategist at Daiwa Capital Markets, since Ireland and Portugal are “two economies that are fully financed” through euro-zone and IMF bailouts have been virtually erased from traders’ radar screens.
“With no intention, and possibly not enough firepower, to intervene in the Italian and Spanish bond markets, spreads are set to widen further and uncertainty will increase in the absence of any backstop that could halt the crisis from spreading further,” Blattner said.
In addition, Trichet acknowledged that the vote to resume bond purchases hadn’t been unanimous, but that an “overwhelming majority” of the ECB’s 23-member Governing Council had approved the plan. Subsequent news reports said Bundesbank President Jens Weidmann had opposed the move.
“This is a very bad signal and a sign that it is a split institution,” said Allan von Mehren, chief analyst at Danske Bank in Copenhagen.
On Friday, the split appeared even deeper. Dow Jones Newswires reported that Juergen Stark, a member of the ECB’s Executive Board, also opposed the renewed bond-buying program, along with at least one central bank from the Benelux region.
“This is interesting, for the usual procedure is for the ECB’s six-person board to agree a common line by a majority vote in advance of the council meeting, and so it has been our understanding that dissent from officials on the board is highly unusual,” said Julian Callow, chief European economist at Barclays Capital.
ECB member Luc Coene acknowledged Friday that the purchases had failed to halt contagion fears and said the move puts renewed pressure on politicians to come up with a solution.
The bond purchases “clearly didn’t help if you look at the market reactioin,” Coene, the head of Belgium’s central bank, told Belgian radio in an interview.
Coene said politicians need to improve communications with the market and make moves to strengthen economic governance across the euro zone or risk the future of the shared currency. At the same time, he said the markets “underestimate the political will to maintain the euro.”
Despite the ECB’s internal bickering, Danske’s von Mehren says intensifying global market turmoil is getting to the point where a “massive policy reaction” is now likely. He expects the ECB to give in and embark on major purchases of Spanish and Italian bonds.
Adds von Mehren: “The ECB is the only one now to stop this and the pressure is huge on ECB as this will affect the whole world.”
William L. Watts is a reporter for MarketWatch in Frankfurt.
