Saturday 10 December 2016

Top global fund says ECB policy of buying bonds is working well

PIMCO insists current interventionist approach is bringing much-needed credibility as borrowing costs continue to fall

Published 11/08/2011 | 05:00

Italy's Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti look on during a meeting with unions and employers at Chigi Palace in
Rome yesterday. Italian and Spanish yields are both hovering at around 5pc – well out of the danger zone where it would be too expensive to borrow
Italy's Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti look on during a meeting with unions and employers at Chigi Palace in Rome yesterday. Italian and Spanish yields are both hovering at around 5pc – well out of the danger zone where it would be too expensive to borrow

THE world's biggest bond investor says the European Central Bank (ECB) policy of buying government bonds is credible and is working.

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In a research note published yesterday, Andrew Balls, of California-based PIMCO, said the ECB action "brought a much-needed and credible external balance sheet to bear".

The comments came after the ECB intervened in the bond markets dramatically this week buying Italian and Spanish government bonds.

Mr Balls said that, in the longer term, governments are likely to end up issuing common eurozone bonds or having bonds issued by individual countries backed by cross-border guarantees in order to finally end the crisis.

PIMCO manages the world's largest mutual fund and controls investments of around €700bn.

Sustained buying by the ECB over the past three days has brought down borrowing costs for all euro area governments, after a period of wild price movements that threatened to launch a fresh wave of country bailouts.

The ECB is reckoned to have bought Spanish and Italian bonds over each of the last three days -- after it got backing for the scheme from most euro area central bank heads on Sunday.

It bought Portuguese and Irish bonds at the end of last week -- in an earlier effort to put a floor under prices.

PIMCO, a major bond owner, last night gave enthusiastic backing to the effort.

"By preventing a downward spiral of contagion it can hope to restore stability," Mr Balls said.

"There is thus the potential for an end to damaging games of chicken between the eurozone's monetary and fiscal authorities," he added.

He singled out open conflicts between Germany and the ECB on how to address bailouts as a factor in the failure to contain the debt crisis. And he warned that contagion could go beyond Italy and Spain to threaten France if the crisis continues.

Stability

PIMCO warned that significant risks remain and said the decision to support markets with bond buying will not ultimately restore stability to European markets.

"We are not at the beginning of the end of the eurozone crisis. We may, however, be at the end of the beginning."

In the bond markets the ECB action continued to have an effect yesterday. Greece, with 10-year yields, or borrowing costs, of 14pc is now the only euro area government that would be charged over 10pc to borrow in the markets.

For months Portugal and Ireland were also tarnished by double-digit yields. Irish borrowing costs, or notional borrowing costs, have dropped to just over 9pc. Italian and Spanish yields are both hovering at around 5pc -- well out of the danger zone where it would be too expensive to borrow.

Meanwhile, talks between the EU and bankers' lobby the Institute of International Finance (IIF) on how to involve private sector lenders in the second Greek bailout continue.

Sharing the bailout costs with banks and other borrowers was a key part of a deal for Greece agreed on July 21 -- but the details have yet to be signed off.

Last night it emerged that officials are considering changing the plan to swap Greek government bonds for new longer-terms debt. The original plan was only to swap bonds that are due to be repaid before 2020 -- but that could be extended out to 2024 bonds a senior Greek banker said yesterday.

Meanwhile, ratings agency Fitch cut Cyprus's credit rating by two notches to BBB due to fiscal slippages, saying the island state was likely to require a bailout to meet its funding needs.

The other two main rating agencies, Standard & Poor's and Moody's, both cut the island's rating at the end of July. Moody's rates Cyprus Baa1, Standard and Poor's BBB-plus. (Additional reporting Reuters)

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