Belated ECB action works, but change needed
THE European Central Bank (ECB) finally rolled up its sleeves and got to work calming markets across Europe this week with a combination of tough talk and targeted large scale buying of government bonds.
It worked, but now the market is looking for, and even expecting, a major policy statement at today's ECB news conference in Frankfurt.
However, if the bank fails to deliver a clear and coherent plan to halt the debt crisis the current lull in Europe's debt crisis will be short-lived.
Bond yields fell and markets were dramatically calmer yesterday as investors lapped up ECB boss Jean Claude Trichet's emphatic statement of support for peripheral economies.
He told investors they had underestimated the ECB's determination to bolster financial stability.
The remarks had real potency, coming after the ECB had stepped into the market directly, buying bonds issued by European governments in a successful effort to bring down the interest rates being demanded by private sector investors.
Speculators betting on defaults by EU members were caught off guard by the news and were forced to buy bonds in order to rebalance their portfolios, which made the market impact even more dramatic.
Trichet hinted that further action by the ECB was possible.
While the ECB was never intended to be a buyer of government bonds or to replace private sector lending to member states, it is more likely that this week's moves are aimed at simply buying time for the EU itself to announce massive structural changes.
This may include a European Stability Mechanism (ESM), a permanent and tougher alternative to the ad hoc bailouts of Greece and Ireland.