Europe pins hopes on ECB as crisis fears spread

By Luke Baker and John O'Donnell

BRUSSELS | Wed Dec 1, 2010 11:21pm GMT

BRUSSELS (Reuters) - The European Central Bank is under pressure to unveil new steps to stabilise the euro zone when it meets on Thursday as the currency bloc battles a crippling debt crisis that has stoked contagion fears in the United States and Asia.

Germany struggled to sell its government debt on Wednesday and Portugal's borrowing costs soared in further signs that an 85-billion-euro ($110.7-billion) EU/IMF rescue of Ireland last weekend and public assurances from leaders that the euro will be defended at any cost have failed to impress investors.

European Union leaders appeared to pass the baton to the ECB, which holds its monthly meeting on Thursday. Economic and Monetary Affairs Commissioner Olli Rehn said recent EU actions provided a sound basis for further stabilisation measures by the central bank, and European Commission President Jose Manuel Barroso said he was confident the ECB would take whatever action was needed.

"I'm sure the ECB is analysing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," he said.

In Washington, the White House said President Barack Obama was receiving regular updates during his daily economic briefings, while a senior Treasury official was heading to Berlin for talks on the economic situation after meetings on Wednesday in Madrid.

"It's important to the global economy and to our economic recovery," said White House spokesman Robert Gibbs. A senior G20 source in Asia also told Reuters deputy finance ministers discussed the situation on Monday.

A U.S. official also told Reuters that Washington would support boosting an EU rescue facility via IMF funds, news that bolstered the euro currency. "It is up to the Europeans," the U.S. official said. "We will certainly support using the IMF in these circumstances."

A Treasury Department spokesman later said an "extra commitment is not something we're discussing right now.

HIGHLY CONTROVERSIAL

Markets were focussing on ECB President Jean-Claude Trichet's news conference due at 1330 GMT on Thursday where the central bank could announce an expansion of its government bond purchase program, launched in May after Greece was bailed out.

But it has been highly controversial within the bank and used erratically. Influential Bundesbank head Axel Weber has called for the program to be scrapped, and fellow ECB members have criticised the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt in a policy known as quantitative easing.

Any sense from fiercely independent central bankers that they were being bullied by EU politicians into making bond purchases could further deepen opposition to such a step.

With the euro under threat, however, they may decide they have no other choice.

In recent days, economists have urged the ECB to throw out its rule book and do all it can to save the euro, particularly since governments seem to be running out of ideas for restoring confidence in their monetary union.

"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.

http://uk.reuters.com/article/idUKTRE6AO1NY20101201