Eu­ro­zone braces for Euro­pean Cen­tral Bank liq­uid­ity moves

The Pak Banker - - International3 -

FRANK­FURT: Fi­nan­cial mar­kets were in a high state of alert on Thurs­day, await­ing a Euro­pean Cen­tral Bank meet­ing ex­pected by many to sig­nal ac­tion to tame the eu­ro­zone debt cri­sis now threat­en­ing Spain.

Econ­o­mists said many in the mar­kets think the ECB could now main­tain or even boost cheap fund­ing for banks rather than con­tinue wind­ing down in a key stim­u­lus mea­sure, as it ex­pected to do ear­lier. Ru­mours said "the ECB will an­nounce some big and bold moves on its govern­ment bond pur­chase pro­gramme," Uni­Credit fixed in­come strate­gist Luca Caz­zu­lani told AFP.

But he and oth­ers did not ex­pect the tra­di­tion­ally cau­tious cen­tral bank to roil an al­ready tense sit­u­a­tion fur­ther.

A grow­ing be­lief that the ECB will sig­nal more help for banks, rather than the be­gin­ning of a wind­ing down, were a key fac­tor in an eas­ing of mar­ket pres­sure on Spain on Wed­nes­day.

This was be­cause it would mean a re­duc­tion of risk for in­vestors who have been alarmed by a de­ci­sion by eu­ro­zone fi­nance min­is­ters to in­crease their risks.

"We ex­pect no 'shock and awe' an­nounce­ment" on ad­di­tional pur­chases of eu­ro­zone sov­er­eign bonds, Caz­zu­lani said. While the ECB's main in­ter­est rate was ex­pected to re­main at a record low of 1.0 per­cent, pres­i­dent Jean-Claude Trichet could sug­gest that the bank would make more bond pur­chases through its Se­cu­ri­ties Mar­kets Pro­gramme, he noted.

"A lot of in­vestors have pro­gres­sively turned their at­ten­tion over the past few days to the ECB as the po­ten­tial ac­tor that could put the fire out," the bond strate­gist said.

Un­der a con­tro­ver­sial pro­gramme that has di­vided the bank's gov­ern­ing coun­cil, the ECB has bought nearly 70 bil­lion eu­ros (90 bil­lion dol­lars) worth of govern­ment bonds since May, a mod­est sum com­pared to moves by the US Fed­eral Re­serve and the Bank of Eng­land. Some in the mar­kets have spec­u­lated that the ECB could now pull out the stops to keep a fes­ter­ing debt cri­sis from spread­ing to ma­jor economies like Italy and Spain.

Such a move would present ECB pol­i­cy­mak­ers with a ma­jor dilemma how­ever, Caz­zu­lani said. "The prob­lem with buy­ing large amounts of debt is that it would be­come very dif­fi­cult to ster­ilise them," he said, as the ECB cur­rently does by tak­ing an equiv­a­lent sum in short-term de­posits from com­mer­cial banks as an off­set. "If they don?t ster­ilise it it will be po­lit­i­cally un­ac­cept­able for some EU coun­tries" which fear in­fla­tion could take hold in the 16-nation eu­ro­zone. Buy­ing govern­ment debt with­out off­set­ting the op­er­a­tions amounts to cre­at­ing money and as the money sup­ply in­creases so does the risk of in­fla­tion, which would raise hack­les in eu­ro­zone heavy­weight Ger­many. -Afp

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