ECB buying fails to halt dramatic selling wave
Under pressure Italy sees its borrowing costs grow to highest level since 1997
THE European Central Bank (ECB) failed to halt a slide in the bond markets yesterday, despite attempting a dramatic intervention to shore up prices for euro area government debt by buying bonds.
The gesture failed to convince investors and Italy's cost of borrowing rose to the highest level since 1997. Spain, Belgium, Cypus and even France all came under intense pressure in the markets.
Worryingly that slump came after the ECB revealed a resumption of its government bond purchases after a 16-week lull at a press conference hosted by Mr Trichet.
"You will see what we do," ECB President Jean-Claude Trichet said after he was asked why the bank had not been actively supporting bond prices at a press conference in Frankfurt.
"I wouldn't be surprised that before the end of this teleconference you would see something on the market," he said.
Traders said the comments were made around the same time the bank bought Irish and Portuguese government bonds in anonymous purchases that Mr Trichet refused to confirm but that moved prices sharply for the two borrower nations.
The ECB's bond purchases are aimed at smoothing out volatility in the markets by ensuring there is always a buyer of last resort when ordinary investors are too nervous or cash-strapped to buy debt.
However, the ECB is a reluctant buyer. Last month euro-area leaders agreed that responsibility for the programme had been shifted to the European bailout funds -- but that handover has not happened yet.
The lack of a buyer of last resort for bonds is blamed by some for the large falls in prices paid for Italian and Spanish bonds over the past week.
The falls pushed up borrowing costs for both countries, raising fears that either one could need an Irish-style EU bailout. Both are dramatically bigger economies than any country rescued to date.
Analysts said the news that the ECB bought Irish and Portuguese instead of Italian or Spanish bonds had left people scratching their heads.
"Buying Irish and Portuguese bonds doesn't address the risk of Spain and Italy becoming gripped by contagion," said Gavan Nolan of Markit in a note to clients.
The strategy left a suspicion that the ECB focused its effort on small countries with less debt because it is easier to move smaller markets -- hardly a confidence-boosting effort.
The Spanish and Italian central banks are also thought to have bought their countries bonds in the markets yesterday -- but interventions did little to buck the market trend.
Italy's 10-year yield hit 4.26pc at one stage, the most since 1997. Spanish borrowing costs also ended the day higher.
Tiny Cyprus, which was tipped as a potential bailout candidate earlier this week, has seen bond yields spiral out to 11pc over the past week.
The premium investors' demand to hold French rather than German government bonds hit the highest level since the launch of the euro at 0.87pc yesterday and the difference between Belgium's 10-year yield and Germany's climbed to 2.21pc. (Bloomberg)