March 6, 2021

E.C.B. Fails in Bid to Quell Sovereign Debt Crisis

The show of force initially bolstered Italian and Spanish bonds. But the move appeared to backfire as stock markets in Europe and the United States fell sharply after Jean-Claude Trichet, the central bank’s president, warned of dangers ahead. The modest scale of the bank’s bond buying apparently fell short of what investors considered adequate.

The market downturn began in Europe but quickly spread to the United States as soon as trading opened Thursday morning on intensifying investor fears about a slowdown in global economic growth and worries about Europe’s debt crisis, which is centered now on Italy and Spain.

In another response to the escalating crisis, the E.C.B. moved to prop up weaker banks that may be having trouble raising funds, expanding its lending to euro zone institutions at the benchmark interest rate. The central bank left that rate unchanged at 1.5 percent, while the Bank of England left its benchmark rate at a record low of 0.5 percent.

Mr. Trichet declined to say what bonds the bank was buying or how much. He said the bank acted in response to “renewed tensions in some financial markets in the euro area.” It was the first such intervention since March.

Mr. Trichet also said that uncertainty created by the U.S. budget debate had unsettled European markets.

“It’s clear the entire world is intertwined,” he said. “What happens in the U.S. influences the rest of the world.”

As markets demanded higher risk premiums on Spanish and Italian bonds during the past week, analysts began to speculate that the E.C.B. would return to the bond market. But most had not expected the bank to act so quickly.

The E.C.B. will not disclose the scope of its bond buying until next week at the earliest, but early indications were that the amounts were relatively modest.

“It might be interpreted as more of a warning shot rather than a broad-based onslaught,” analysts at Barclays Capital wrote in a note.

The E.C.B. first began buying bonds in the open market in May 2010, but tapered off the interventions earlier this year, a move investors may have interpreted as a lack of resolve. Michael T. Darda, chief economist at MKM Partners in Stamford, Connecticut, warned Thursday that half-hearted forays into the bond market “will fail, just like they did last year.”

“In each case, the debt crisis got worse instead of better,” he wrote in a note.

The E.C.B. also responded to signs of stress in interbank markets as institutions, wary of each other’s exposure to troubled government paper, became reluctant to lend to each other. One worrisome sign was a spike in the cost for European banks to borrow dollars in the open foreign exchange market.

Mr. Trichet said that next week the E.C.B. would lend banks as much cash as they wanted for six months at the benchmark interest rate, assuming the banks could provide collateral. A six-month term is longer than is customary.

The central bank’s actions on Thursday provided another example of the E.C.B. acting as the euro zone’s firefighter in the debt crisis.

European leaders decided last month to authorize the European Financial Stability Facility — the European Union’s bailout fund — to buy bonds in open markets, relieving the E.C.B. of that responsibility.

But it will take months before the rescue fund. known as the E.F.S.F., is able to start making purchases. In addition, European leaders did not increase the size of the fund, leaving questions about whether it would be up to the task if a country as big as Italy or Spain needed help.

Speaking to reporters Thursday after a regular meeting of the E.C.B. governing council, Mr. Trichet beseeched political leaders to speed up efforts to cut their budget deficits and remove impediments to growth, like overly protected labor markets. “The key for everything is to get ahead of the curve, in fiscal policy and structural reform,” he said.

With Italy in danger of being swept over the same waterfall as Greece, Prime Minister Silvio Berlusconi on Thursday pledged sweeping changes to increase growth.

At a news conference later, the Italian finance minister, Giulio Tremonti, said Italy was in contact with the European Union, International Monetary Fund and Organization for Economic Cooperation and Development on strategies for growth.

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