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ECB stays out of bond markets for three weeks

Published 22/03/2011 | 07:43

THE European Central Bank (ECB) went three weeks without intervening in the government bond market, before stepping in to support struggling Portugal last Friday, according to figures released last night.

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It is only the third time since last May that the bank has been out of the market for such a long period and came despite massive pressure on Portugal's cost of borrowing, which threatens to force it to tap the bailout fund.

In a statement yesterday, the ECB said it settled €77.5bn of bonds through its Securities Markets Programme in the past week. The total is unchanged since the end of February.

Over the past month, the bond markets have been less volatile than they were in 2010, allowing the ECB to take a back seat.

However, over the same period borrowing costs have been rising consistently for countries including Ireland and Portugal.

The closely watched yield on Portugal's 10-year government bonds was above 7pc and all the time the ECB sat out the market.

As a result few analysts now think Portugal can remain free of a bailout deal.

Questions are being asked about the rationale for the bond buying scheme, or the ECB's competence to execute the programme effectively.

Traders said the ECB came into the market, buying bonds on Friday, but those deals would not be officially counted for another week.

Friday's purchases, or at least reports of the purchases, helped bring down Portugal's 10-year borrowing costs from 7.5pc to 7.2pc after its bond yields, or cost of borrowing, threatened to rise to a record high.

The latest data, excluding Friday's deals, shows the ECB has only intervened to support crisis-hit markets in two of the past eight weeks.

In fact, just €3.6bn of the ECB's €77.5bn bond purchases was bought this year.

The bulk of purchases for 2011 happened in just one week, in the run-up to a Portuguese government bond auction in the first week of December.

The ECB has always been a reluctant buyer of bonds, seeing the programme as a distraction from its main job of economic management.

The programme was launched in May to prevent technical or temporary issues in the markets from spiralling out of control.

Earlier this month, European leaders agreed to shift responsibility for some bond purchases to a new bailout fund, but only after 2013.

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