ECB tries to stabilise the cost of Irish borrowing
Central bank buys bonds as support measure
The European Central Bank (ECB) was reported to be buying Irish bonds yesterday as the bank tried to reassure markets that so-called 'peripheral' economies aren't in danger of defaulting on their debts.
While the Frankfurt-based bank was reported to have only purchased €10m of Irish, Greek and Portuguese bonds, the move was designed to convince markets that the ECB will intervene to stabilise European bond prices if necessary. The ECB never comments on bond purchases, but traders claimed it was among the day's buyers.
Despite the moves and an announcement about Anglo Irish Bank, the gap or 'spread' between German and Irish borrowing costs was at 3.81pc in afternoon trading, the highest level since Ireland adopted the euro.
Ireland is still facing the second highest borrowing costs (after Greece) in the eurozone, with 10-year debt trading at 5.89pc. This yield dropped by just two basis points following news that Anglo will be split into a savings bank and an asset management company.
The National Treasury Management Agency will today once again test the appetite of the market for Irish debt, with treasury bills worth as much as €600m being offered at an auction. The short-term money being auctioned will mature next February.
Referring to the ECB, one trader said its influence remained crucial.
"They're trying to remind people they haven't abandoned the market," said Marc Ostwald, a strategist at Monument Securities in London.
The ECB began buying bonds in May as the International Monetary Fund and European Union created a €750bn fund to backstop the single currency, though its purchases have waned over time.
A range of factors are pushing up bond yields in Ireland, Greece and Portugal.
Chief among them is that growth in these economies is going to slow, making the burden of their debts even heavier.
The scale of bank rescues is also concerning some traders. S&P, for instance, claims that Anglo will cost the Exchequer €35bn in total.
Another worry is whether European banks can roll over huge debts during September. There are also questions over asset quality at German banks.
Reflecting the prevailing gloom, Portugal's borrowing costs increased at an auction of €661m of bonds. Some of the bonds mature in 2013, with the others maturing at 2021.
The 2013 sale attracted bids for 1.9 times the amount offered. The 2021 bond auction attracted bids for 2.6 times the amount offered.
Meanwhile, the Federal Reserve said the US economy maintained its expansion, but was showing "widespread signs of a deceleration" in mid-July through the end of August. Its views were based on a survey of 12 regional Fed banks.
Five regional banks reported "economic growth at a moderate pace" and two pointed to "positive developments or net improvements".
The remaining five banks said conditions were mixed or decelerating.
The report underlines the Fed's view that while the recovery from the worst recession in seven decades has cooled, the economy isn't relapsing into a contraction at this point.
In a speech last month, Federal Reserve chairman Ben Bernanke said "the preconditions for a pick-up in growth in 2011 appear to remain in place".