SUPPORT:THE EUROPEAN Central Bank spent €22 billion on government bonds in just two days last week – more than ever before – as it sought to prevent the euro zone debt crisis escalating .
The larger-than-expected display of firepower highlights the scale of the challenge the central bank faces in keeping official borrowing costs under control for Italy and Spain. The size of the intervention though has raised fresh questions about how long its commitment to act will last.
Throughout last week, markets played the guessing game about the European Central Bank’s purchases of Italian and Spanish bonds. However just as nobody could agree ahead of yesterday’s announcement on how much it bought last week, there is little harmony on whether this surprise is positive or negative.
Neil Williams, chief economist at UK fund manager Hermes, is encouraged by the numbers. “I don’t doubt their resolve,” he says.
However, Jim Reid, credit strategist at Deutsche Bank, sees things differently. Before the numbers were released, he argued that anything above €10 billion-€15 billion would be a negative.
“It does seem on the high side. They were much more aggressive on the Monday and Tuesday than we thought,” he says, meaning the ECB had to buy more than he had imagined to move the markets.
The decline in Italian and Spanish yields was marked but it has run out of steam in recent days, as ECB purchases fell, according to analysts.
One investment bank, whose forecasts were particularly accurate, estimates that the ECB bought €12 billion-€14 billion on Monday, €4 billion-€5 billion on Tuesday, little on Wednesday and €3 billion-€4 billion on Thursday and Friday combined. Details of the purchases made from Wednesday onwards will be revealed next week.
“It all depends on what happens next,” says Robert Crossley, head of European interest rate strategy at Citi. “The front-loading of the buying was designed to put the market on the back foot, which it did, but if the market believes there is nothing behind it and there isn’t more to come, then spreads will start to drift wider again.” – Copyright The Financial Times Limited 2011
