March 7, 2021

European Central Bank Buys Bonds to Reassure the Markets, to Little Avail

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, while the modest scale of the bank’s bond-buying apparently fell short of what investors considered adequate.

Compounding the tension, a top European official said that a deal reached two weeks ago to ease the debt crisis was not working and urged leaders to consider bolstering the region’s existing bailout fund.

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 central bank of that responsibility. But it will take months before the rescue fund 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.

The European Commission president, José Manuel Barroso, has been pushing euro zone leaders to do more. In a letter released Thursday, he called for a “rapid reassessment of all elements” related to the stability fund, so that it was “equipped with the means for dealing with contagious risk.”

He also criticized European politicians for “the undisciplined communication and the complexity and incompleteness” of the package agreed to at the summit meeting on July 21.

“Markets remain to be convinced that we are taking the appropriate steps to resolve the crisis,” he wrote. “Whatever the factors behind the lack of success, it is clear that we are no longer managing a crisis just in the euro area periphery.”

As part of its response to the crisis, the central bank also moved to prop up weaker banks that may be having trouble raising cash, 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.

Traders said the central bank had bought Irish and Portuguese government debt during the day. But the bank did not buy bonds of Italy and Spain, two countries with huge bond markets and now seen as most vulnerable in the region.

The move to buy Portuguese and Irish debt made little sense, given that they are insulated by their official bailouts and no longer have to raise money on the market, said Michael Leister, a fixed-income analyst at WestLB in Düsseldorf, Germany.

Mr. Trichet, however, had “opened the door to acting on behalf of Spain and Italy,” he added. The yield on 10-year Italian debt rose 11 basis points, to 6.19 percent. Yields on 10-year Spanish bonds rose three basis points, to 6.28 percent. Earlier, Spain sold 3.3 billion euros, or $4.7 billion, of bonds due in 2014 with demand more than twice the level of supply. But the average yield rose to 4.813 percent from 4.037 percent at a comparable auction in June.

“Over all, sentiment hasn’t changed yet,” Mr. Leister said after the central bank had acted. “Everyone’s afraid that the debt spiral will become a self-fulfilling prophecy. And the E.C.B. is the only institution with the firepower to stop the situation in the short term.”

The central bank 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, Conn., 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.

Jack Ewing reported from Frankfurt and Matthew Saltmarsh from London. Julia Werdigier contributed reporting from London and Rachel Donadio from Rome.

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