ECB expected to announce new ways to tackle euro crisis

Thu, Dec 2, 2010, 00:00

THE EUROPEAN Central Bank is widely expected to announce further measures to resolve the euro zone crisis at today’s meeting of ECB policymakers in Frankfurt.

Stock markets and European government bonds rallied yesterday amid anticipation that some form of announcement is imminent.

The cost of borrowing for euro zone countries fell in afternoon trading, while the euro strengthened against the dollar and yen.

Ireland’s theoretical cost of borrowing, which has been hovering at more than 9 per cent for almost a week, fell slightly. However, since concluding the terms of its rescue deal Ireland does not plan to borrow in the market for up to three years.

Portugal – which is seen as the next euro country to need external assistance – had to offer a higher interest rate in order to raise debt yesterday, indicative of the continuing tensions in the single currency area over the creditworthiness of weaker members.

Germany also saw weak demand for its debt, underlining the fact that fear of the weaker states defaulting on their debts was starting to weigh on Germany’s standing in the debt market.

The widespread expectation that the ECB will act to curb the euro zone crisis followed indications from ECB president Jean-Claude Trichet this week that Europe may increase its bond-buying programme.

The purchase of European sovereign debt would represent a significant change in ECB policy. The bank has kept a tight cap on its government bond-buying programme since the onset of the financial crisis at the behest of Germany and other member states worried about the possibility it will encourage inflation.

The US and British central banks have – in contrast – bought large amounts of their country’s debt in order to inject money into their respective economies.

However, the ECB has been coming under pressure in recent days to intervene amid fears that Ireland’s external assistance failed to stem the contagion effect on other euro zone countries.

“There is a feeling that things have got to a point where the ECB has to do more,” said Gilles Moec, an economist at Deutsche Bank yesterday.

An intensification of the bond-buying programme would meet resistance from some members of the ECB governing council. Germany’s Axel Weber, president of Bundesbank, has opposed bond purchases.

In a further indication of concern about the euro zone debt crisis, the US treasury announced its intention to dispatch undersecretary for international affairs Lael Brainard to Europe this week to discuss the turmoil. Ms Brainard will meet government officials in Madrid, Berlin and Paris over the next few days.