ECB intervene to stabilize markets in eurozone

The European Central Bank has broken new ground in the eurozone crisis with hints that it could start unlimited buying of stricken member states’ bonds to drive down their crippling borrowing costs. After initial disappointment at ECB head Mario Draghi’s failure to take immediate action to help ailing countries at a meeting Thursday, many analysts were more encouraged after giving his remarks a second reading. Draghi said the central bank could intervene directly in the bond markets under a program known as SMP to help countries left high and dry in the crisis; but this depended on governments holding up their end of the bargain. He also said the ECB might consider additional measures to calm markets that have driven borrowing costs for Italy and Spain back near to levels that forced Greece, Ireland and Portugal to seek massive bailouts. Under the SMP program launched in May 2010 and suspended four months ago, the ECB had said its purchase of sovereign bonds was limited in both time and amount. Christian Schulz of Berenberg bank said the ECB had “finally stepped up to the plate meaningfully” which could help prevent further trouble. “If the ECB convinces markets that it is providing a reliable safety net for solvent sovereigns which stay on the reform path, it may lure more investors back into these markets,” he said. “In that case, the ECB may not have to buy many bonds.” Draghi’s comments Thursday disappointed markets expecting immediate action. But on Friday, it was the complete reverse with Madrid and Milan soaring by 6.0 percent and more – albeit helped too by better-than-expected U.S. jobs data. Borrowing rates for Spain and Italy remained dangerously high, but were down sharply from a spike on Thursday. The ECB chief also stipulated that it would only intervene if Europe’s rescue fund, the European Financial Stability Fund, and its permanent successor, the European Stability Mechanism, were also involved. This would require countries in dire straits to ask for bailouts, which go hand-in-hand with strict reform conditions and targets – hard to swallow medicine for any government. Erik Nielsen of Unicredit said he was concerned by such strings attached and predicted a potential dilemma in the event of a government failing to reach agreement with the EFSF and ESM. “Do they stick with their new doctrine and refrain from intervening and accept what could well be sovereign default, or do they risk their credibility?” he said, describing the potential catch-22. But the principle of conditionality is important, especially for the German central bank, the Bundesbank, which has repeatedly stressed its opposition to the bond-buying program. The bank, representing the interests of the eurozone’s top economy and paymaster, argues that such moves in effect subsidize public deficits, run counter to the ECB’s statutes and pose a serious threat to price stability. But in an environment in which there seems little imminent danger of high inflation, German public opinion seems to be changing, according to a running theme in several newspaper editorials. “In light of the drama [in the eurozone], you have to say that the narrow view of the Bundesbank no longer corresponds to the current reality in Europe,” the daily Sueddeutsche Zeitung said. Business daily Handelsblatt voiced concerns that the Bundesbank could end up isolated, particularly as German Chancellor Angela Merkel and her trusted finance minister, Wolfgang Schaeuble, welcomed Draghi’s much-heralded pledge last week to “do everything” within the ECB’s statutes to protect the euro. “They have done and continue to do whatever they can within fairly strict limits imposed on them,” said Gilles Moec of Deutsche Bank, noting that the U.S. Federal Reserve and the Bank of England had more room to maneuver. “Draghi went as far as he could, in our view, to indicate in no uncertain terms that massive ECB support would be available as soon as the potential recipient countries – presumably Spain and Italy – accept to trigger the European support procedure,” Moec said. In an upbeat assessment of ECB, he added: “Draghi in our view is on his way to deliver on his promises from last week.” From:Dailystars