Thread: ECB Throws Italy And Spain To The Wolves

The ECB throws Italy and Spain to the wolves

The European Central Bank has abandoned Italy and Spain to their tortured fate.


Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March. Photo: Reuters

By Ambrose Evans-Pritchard
10:01PM BST 04 Aug 2011
617 Comments

Its refusal to act in the face of an existential threat to monetary union has set off violent tremors across the global financial system, raising the risk that the crisis will spiral out of control.

Bank shares crashed in Madrid and Milan, with Intesa Sanpaolo down 10pc and Italy's MIB index reduced to its knees with a one-day fall of 5.2pc. Share trading was suspended at a string of bourses across Europe.

Yields on 10-day US debt fell to zero in a replay of panic flight to safety seen during the onset of the Lehman-AIG crisis three years ago.

Jean-Claude Trichet, the ECB's president, said the bank had purchased eurozone bonds for the first time since March but this token gesture was confined to Ireland and Portugal, countries that have already been rescued.

Professor Willem Buiter, Citigroup's chief economist, said the apparent ECB action was pointless. "The warped logic of intervening in two countries that don't need it is as strange as it gets."

Mr Buiter said Europe risks a disastrous chain of events and the worst financial collapse since the onset of the Great Depression unless Europe's central bank steps in with sufficient muscle to back-stop the system.

"The ECB has yet so show it understands that it is the only institution that can save Italy and Spain from fundamentally unwarranted defaults. Everybody is afraid and real money investors are dumping their holdings. The ECB must step in to cap the yields at 6pc or 6.5pc and put a floor under the market," he said.

Italian yields spiked to 6.21pc yesterday after a relief rally wilted. Spanish yields hit 6.3pc. The debt of both countries is hovering near 400 basis points over German Bunds, 50 points shy of the level used by central clearing house LCH.Clearnet to trigger margin calls. This was the point where the debt crises of Greece, Ireland and Portugal crossed the line of no return. Spain has cancelled further debt auctions in August.

"As long as the ECB stays on the sidelines, a speculative, fear-driven withdrawal of market funding can feed a self-fulfilling insolvency. Any number of banks and insurance companies would take huge hits. The ECB will have to come in, or accept the biggest banking crisis since 1931," Mr Buiter said.

He said the "fundamental design flaw" in economic and monetary union is the lack of a lender of last resort.

EU leaders agreed in late July to boost the powers of the eurozone's €440bn (£382bn) European Financial Stability Facility (EFSF) bail-out fund so that it may intervene pre-emptively in countries in trouble, but this has to be ratified by all national legislatures and may take months.

Mr Buiter said the fund needed to be increased five-fold to €2.5 trillion to be credible in the long run.

"It is quite irresponsible that the euro member states decided to send their parliaments on holiday this summer before they had enhanced the EFSF to effective scope and size. Crises can happen even during inconvenient periods," he said.

While Spain's leader, Jose Luis Zapatero, has suspended his holiday and Italy's Silvio Berlusconi has pledged fresh crisis measures, German Chancellor Angela Merkel is on holiday in Austria and seemingly in no mood to revisit the summit battles of late July.

Jose Manuel Barroso, the European Commission's chief, has called for "a rapid reassessment" of the EFSF in order to deal with contagion and a mounting systemic threat. "It is clear that we are no longer managing a crisis just in the euro-area periphery," he said.

Key eurozone officials met yesterday to discuss raising the fund's firepower to €1 trillion, perhaps using a manoeuvre that skirts legal restrictions, although Germany's finance ministry shot down the proposal as pointless coming so soon after the July summit. Bail-out fatigue is becoming ever clearer in Germany, Holland, and Finland, where tempers are fraying.

Mr Trichet said the ECB's governing council was divided over bond purchases but gave no further details. German sources said Bundesbank chief Jens Weidmann voted against intervention, repeating his well-known view that further "collectivisation of risks" poses a threat to monetary stability.

German-led hawks say the ECB lacks treaty authority to keep amassing a portfolio of bonds, is on a slippery slope towards debt monetisation and is being drawn deeper into tasks that belong to fiscal authorities.

ECB officials are aware token purchases of Spanish and Italian bonds would soon be tested by the markets, pulling the bank ever deeper into a monetary swamp. The two countries' tradable public debt is more than €2 trillion.

The ECB has purchased almost a fifth of the combined debt of Greece, Ireland, and Portugal yet still failed to stem the crises in these countries. Any intervention in Italy and Spain would have to be on the sort of overwhelming scale undertaken by the US Federal Reserve.

"Italy is the third-biggest bond market in the world: the idea that a bit of ECB buying can make any long-term difference is very misplaced," said Marc Ostwald from Monument Securities.

Mr Ostwald said the ECB appeared to have bought some Irish bonds today. "This is their way of giving Ireland a pat on the back for delivering on austerity, to show that Ireland really starts to divorce itself from others in crisis."

The ECB increased liquidity for banks, offering unlimited funds for six months to prevent the money markets freezing up. The bank also left interest rates unchanged at 1.5pc and signalled an end to its rate-rise cycle.

http://www.telegraph.co.uk/finance/comm ... olves.html

European Central Bank paralysis sparks global chaos

As central banks around the world scramble for measures to fight a fast slowing global economy, the single currency's sovereign debt woes have again moved perilously back to centre stage, causing stock markets to plummet and investors to run for the hills.



Far from managing to calm matters, the ECB succeeded only in inflaming them. Jeremy Warner
6:36PM BST 04 Aug 2011
171 Comments

Torn between the conflicting interests of its 17 constituent members, the European Central Bank is struggling to find meaningful responses. Far from managing to calm matters, it has succeeded only in further inflaming them.

Investors had been primed to expect intervention by the ECB in sovereign bond markets so as to prevent Italy and Spain going the same way as Greece, Ireland and Portugal, and that indeed is what Jean-Claude Trichet, the ECB president, appeared to sanction at his monthly press conference on Thursday.

But then it transpires that to the extent that there was intervention, it was confined to Irish and Portugese bonds, where the game is already up and bond purchases are going to make little or no difference.

After initial confusion over what precisely Mr Trichet meant in confirming resumption of the ECB's bond purchasing programme, investors responded accordingly. Up went Spanish and Italian spreads to levels which are now within a whisker of those that forced Greece, Ireland and Portugal to seek a bailout.

Matters were made worse still by the president of the European Commission, Jose Mauel Barroso, who in a letter insisted that the European bailout fund needed urgent reassessment only to be slapped down by German officials. Policymakers are at sixs and sevens, unable to agree the measures necessary to resolve the crisis. Italy and Spain are being abandoned to their fate.

What on earth is the ECB playing at? It is almost as if policy makers are deliberately conspiring to bring the crisis to a head. If that's the intention, they are certainly succeeding. Mr Trichet's apparent nonchalance has caused a renewed outbreak of chaos in capital markets. He appears powerless before the storm.

Trying to explain the machinations of the ECB is a bit like the old fashioned science of "Kremlinology", where lack of reliable information forces the analyst to read between the lines, thereby arriving at frequently misleading conclusions based largely on guesswork.

But here's what we can only surmise was going on within the ECB's ruling council. What we do know is that there was some sort of a row about whether to resume bond purchases and in what form. We know this because Mr Trichet admitted that the decision was not unanimous.

But was the row over whether to resume the bond purchases in the first place, or was it about which sovereign bond markets to target? To expand the programme to the Italian and Spanish bond markets was what was needed, but it is also what in management speak would be called a non trivial decision.

The ECB has always been very uncomfortable with the idea of intervening directly in secondary bond markets, though quite what the difference is between quantitative easing of this type and accepting bonds as collateral against liquidity, which the ECB does all the time, is something of a mystery.

I guess the answer is that direct bond purchases are a form of fiscal intervention that potentially goes beyond the role of monetary management. In any case, that appears to be why Mr Trichet is so keen that the European Financial Stability Facility (EFSF), Europe's inter-government bailout fund, assumes responsibility for market interventions as soon as possible. He's afraid of debasing the currency, and of compromising the ECB's independence with high risk balance sheet expansion.

The only problem is that the EFSF is not yet sanctioned to do bond purchases, and in any case is not big enough as it stands to make a meaningful impact. Only the ECB can print money to fund purchases. Such action is fiercely opposed by Germany, with its still relatively recent experience of hyper inflation and its huge savings surplus.

It had to be dragged kicking and screaming into going along even with the comparatively limited "securities market programme" (SMP) we've seen so far. To wade into the Italian and Spanish debt markets would take things to a whole new level.

So the ECB is forced to do only what it can, which isn't very much. Ireland was rewarded for its determination to deliver on the austerity programme with a little bit of further bond market intervention, futile though this gesture might seem.

By refusing to offer the same support to Italy, the ECB turns up the heat on Rome to bring forward and enlarge its austerity measures with the same resolve being shown by Ireland. Think of the moral hazard that would be created if nations came to think there was a level beyond which the ECB would not allow yields to rise, thereby encouraging governments to shirk their austerity programmes.

In good times, such disciplines might seem appropriate, but to impose them in the midst of a panic is ill judged and deeply damaging. Europe seems caught in a surreal world of counter-productive competition to see which nation can don the most uncomfortable hair shirt. The negative consequences for growth scarcely need spelling out.

In the meantime, the financial crisis is back with avengeance. In less than a month, the FTSE 100 has fallen by more than 10pc. In recent days we've seen both the Japanese and Swiss central banks move to counter the ruinous effect the strong yen and Swiss franc are having on their industry by powering up the printing presses again in an attempt to deter the inflow of capital. With the recovery stalling in both the US and the UK, it cannot be long before the Federal Reserve and the Bank of England follow suit.

We appear to be in the early stages of a classic race to the bottom of competitive devaluation. The way things are going, protectionism won't be far behind. The fiscal canon is exhausted and policymakers are struggling to find alternatives. Not since the deepest days of the banking crisis, when we were looking into the abyss of a second Great Depression, have things looked so scary. Policy seems impotent before the storm.

http://www.telegraph.co.uk/finance/comm ... chaos.html