ECB tries to steady Irish bonds again
THE presence of the ECB in the bond market drove down Ireland's borrowing costs once again yesterday as Jean Claude Trichet creates time for European governments to rein in their deficits.
Ireland's borrowing costs, for 10-year money, dropped by almost 30 basis points, after traders reported the ECB was again buying Irish and Portugese debt.
The international picture worsened yesterday with a gloomy jobs report in the US.
Employers added fewer jobs than forecast in November and the unemployment rate rose to 9.8pc, pointing to economic weakness that's likely to keep the Federal Reserve pumping money into the financial system.
The scale and length of the crisis in Europe and the US is such that the world's most influential bond strategist -- Bill Gross of the Pimco fund -- said he did not envisage interest rates rising for "years''.
Trichet, for his part, said EU leaders could not just rely on "benign neglect'' to address their deficits. Ireland has the largest deficit in the eurozone at over 32pc of GDP, once bank-rescue costs are included.
No quick fix
"Trichet doesn't see a quick and easy fix," said Axel Merk, president of Merk Investments in Paolo Alto, California.
"The ECB is most reluctant to intervene too heavily in the markets as that would take the pressure off policy makers to follow through with reform."
The ECB's purchases, which were stepped up during Trichet's press conference in Frankfurt on Thursday, have triggered a surge in bond prices across the so-called Europe "periphery''.
The extra yield that investors demand to hold Portuguese 10-year bonds over German bunds yesterday fell below 300 basis points for the first time since August.
Irish yields dropped 28 basis points to 8.51pc after falling 38 basis points on Thursday. The euro rose 0.4pc to $1.3265 yesterday.
Contrary to suggestions from some months ago, the ECB is very much committed to offering exceptional liquidity assistance to banks, lending money over seven days, one month and three months.
However, Trichet has declined to go for full-scale quantitative easing, like the US Federal Reserve.
The refusal to be more aggressive reflects a belief at the ECB that Europe's debt woes can only be solved by governments embracing austerity.
In a sign the ECB's 22-member Governing Council remains divided, Trichet said the bond plan had only enjoyed the support of an "overwhelming majority" and the extension of liquidity measures had been endorsed by "consensus".
Asked about the size of the cash pool in Paris yesterday, Trichet said that "everything they do needs to be commensurate to dimension of the challenges".