Tuesday 19 September 2017

Markets wait for Trichet's plan to save troubled euro

ECB president Jean-Claude Trichet: determined to quell the crisis. Photo: Bloomberg News
ECB president Jean-Claude Trichet: determined to quell the crisis. Photo: Bloomberg News

Siobhan Creaton and Donal O'Donovan

THE European Central Bank (ECB) is expected to ratchet up its response to the sovereign debt crisis today after its president Jean-Claude Trichet affirmed the eurozone's "determination" to quell the crisis gripping the single currency.

The ECB's governing council meets today, with markets pushing for it to expand its purchases of bonds issued by fiscally stressed European Union countries.

Investors also want it to prolong its programme of special loans to eurozone banks.

Markets regained some poise yesterday amid speculation that the ECB could launch a huge programme of bond purchases.

Yields on government debt issued by Spain, Greece, Belgium and Italy receded amid hopes that the 22-strong council would take dramatic new steps to head off the crisis. The euro rose to 1.306 against the dollar.

The rate of interest being demanded by investors to buy Irish bonds fell back below 9pc for the first time since the bailout. The equivalent yield on Portuguese bonds fell to 6.65pc. The Spanish 10-year yield dropped from 5.533pc to just under 5.3pc. Italian yields fell from 4.66pc to a low of 4.466pc.

Christine Lagarde, the French finance minister, said she welcomed the "extremely active role" the ECB was playing alongside governments.

Momentum

The positive momentum helped a sale of one-year Portuguese bonds. There was better-than-expected demand for the bonds, though the country will pay interest of 5.28pc, up from 4.81pc for its last deal.

A bond auction by Germany struggled to attract investor interest yesterday. Germany placed €4.13bn of five-year bonds, less than the €5bn it had targeted. There was demand for just €4.55bn of the bonds.

Analysts said Germany's struggle to find buyers would have been a shock to the market without the Portuguese deal for comparison but Germany's struggle was seen as a sign that investors preferred to take on risk at hefty price than opt for the safer option.

Mr Trichet's customary monthly press conference today will attract intense scrutiny as investors seek clues on how he plans to respond to the spiralling debt crisis.

Some market players have now called on the bank to buy up to €2 trillion of government bonds to suppress borrowing costs and contain the sovereign debt contagion. So far, it has bought only €67bn.

However, Thomas Mayer, chief economist at Deutsche Bank, said that to embark on such a vast programme of debt purchases would be "a very slippery slope" for the bank, which is prohibited under EU rules from helping to finance government deficits.

"They would be straying away from their mandate and that is not done lightly," he said.

Toby Nangle, the director of asset allocation at Baring Asset Management, said it was more likely that the ECB would announce an increase in the pace of bond purchases, pointing out that there was widespread anecdotal evidence that it had been doing so already this week.

It may also extend unlimited three-month funding to the banking system, which would be a step away from previous plans to take policy back to a more normal footing.

The ECB might also relax collateral requirements for banks to borrow from it and make clear that all eurozone government bonds will continue to be eligible as collateral, irrespective of their credit rating, Mr Nangle said. He added that, for the banks, "that would be a big deal".

ECB buying of government bonds is not a long-term solution in itself, but coupled with structural changes could form the basis for a longer term containment of the debt crisis.

Irish Independent

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