Friday, December 3, 2010

ECB resists pressure to announce new anti-crisis steps

FRANKFURT: The European Central Bank resisted pressure on Thursday, Dec 2 to announce a major bond-buying programme to contain the euro zone debt crisis, despite the risk it could disappoint investors worried about Portugal and Spain.

The ECB had faced calls to rush through new anti-crisis measures at its monthly policy meeting after an 85 billion-euro ($110.7-billion) EU-IMF rescue of Ireland failed to dispel fears that other indebted countries in the single currency area could soon require a bailout.

ECB President Jean-Claude Trichet said the bank had decided to keep interest rates on hold and extended its liquidity safety net for vulnerable euro zone banks, but made no mention of increasing its government bond buying programme.

The ECB started purchasing bonds through its Securities Market Programme (SMP) in May, after Greece was bailed out. Trichet said the policy would continue but declined further comment on it.

"I say we are constantly alert. We are constantly looking at the situation of the markets," Trichet told a news conference.

"The Securities Market Programme is ongoing, I repeat -- ongoing ... I won't comment on the observations of market participants."

The premium investors demand to buy Portuguese and Irish debt over German benchmarks fell on Thursday with traders saying the ECB had been buying the two countries' bonds.

Suggestions that the ECB could agree new measures helped the euro stabilise and lifted stock markets, but analysts said any failure to announce new action could disappoint investors.

The euro fell and Bund futures hit a session high after Trichet gave no indication the ECB was considering increasing its government bond buying programme.

German Economy Minister Rainer Bruederle said before the ECB's meeting that extra liquidity alone would not resolve Europe's problems and described the last U.S. fiscal stimulus package, injecting more money into the economy, as excessive.

"Permanently printing money is not the solution," German Economy Minister Bruederle said. "The money presses must not fall into the hands of politicians."



Some economists say the future of the euro is in doubt and fear contagion to Asia and the United States.

International Monetary Fund chief Dominique Strauss-Kahn, visiting India, said the situation in Europe was "serious" and the IMF was ready to provide financial and technical support to member states if needed.

But EU leaders deny the euro will collapse and dismissed reports on Thursday that they would call a special summit this weekend on the crisis.

Spanish Prime Minister Jose Luis Rodriguez Zapatero said Madrid would not need to tap any European Union funds to help it through its debt problems.

A Spanish bond auction was well received, partly because of hopes linked to the ECB meeting, and Germany's Bruederle said there was a good chance Lisbon and Madrid would not need rescuing.

But even Germany, the euro zone's biggest economy, struggled to sell its bonds on Wednesday and Portugal's borrowing costs rose and some leaders are calling for close fiscal union -- tighter cooperation -- for the euro zone.



Some investors said before Trichet's comments that it was too soon for any conclusive announcement of new action because of a fierce debate in the ECB about the merits of such action.

Bundesbank head Axel Weber has called for the programme to be scrapped and fellow ECB members have criticised the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt.

Some economists have urged the ECB to tear up its rule book and do all it can to protect the euro, particularly because governments seem to be running out of ideas about how to restore confidence in their monetary union.

Before the ECB meeting, markets in Asia followed with Japan's Nikkei scaling a five-month high and markets elsewhere in Asia-Pacific climbing 1.3 percent.

Euro zone officials have admonished markets for doubting the currency bloc's ability to solve its problems but radical ECB action is among the few options left.

Germany has resisted pressure from France and others to turn the euro zone into a "fiscal union," a step that could help the bloc address its economic imbalances but require members to sacrifice sovereignty for the good of the group.

But Zapatero called on Thursday for a "much more integrated fiscal policy" for the euro zone. - Reuters

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