Analysts warn effect of ECB intervention may be short-lived
The European Central Bank was on Monday once again forced to dampen down the flames of the spiralling eurozone debt crisis after political decisions failed to have any effect.
After an emergency telephone meeting of its governing council on Sunday evening, the ECB, which days before relaunched its bond purchasing programme to ease the crisis, announced it would "actively" intervene in the market.
Although not explicitly stated, this was immediately interpreted as the long-awaited announcement that the institution would buy the government debt of market-battered Spain and Italy.
Yield on the countries' 10-year bonds promptly fell, sinking below six percent.
The scale of the ECB intervention will not be known until next Monday however, with the bank only releasing information on its bond holdings once per week.
It's already "undeniably" positive for the markets, said Deutsche Bank economist Gilles Moec, while RBS analysts welcomed the ECB intervening "once again as the last line of defence."
As part of Greek rescue programme last year the ECB agreed, reluctantly, to begin buying the debt of troubled eurozone states.
The ECB held as of last week 74 billion euros of bonds. This is likely to be entirely Greek, Irish and Portuguese debt -- the three countries which have assisted by their European partners and the International Monetary Fund (IMF).
To snuff out the threat of the debt crisis spreading to Italy and Spain, the eurozone's third and fourth largest economies respectively, it will need to go much further, said analysts.
Goldman Sachs economists estimated the ECB would have to purchase at least 100-130 billion euros worth of Italian and Spanish bonds, compared with the total amount it had held until now of 74 billion euros.
"We anticipate the daily run rate of bond buying to be on average around 2.5 billion euros," RBS analysts said in response to the ECB move.
Without a constant buying flow "visible every Monday ... investors' enthusiasm can fade quickly," said Marco Valli and Luca Cazzulani of Italian bank UniCredit.
Whether the ECB ready to intervene so strongly when it has repeatedly expressed that it shouldn't be taking on the role of buying up the debt of troubled eurozone countries is an open question.
The ECB signalled once again on Sunday that it wanted to see the eurozone's crisis fund, the European Financial Stability Facility (EFSF), quickly step in to buy up bonds of troubled members.
It was decided to give the EFSF the authority to purchase bonds of eurozone members at an emergency summit in Brussels on July 21.
French President Nicolas Sarkozy and German Chancellor Angela Merkel promised to put this into place quickly, appeasing an ECB disgruntled over the time it has taken politicians to put into force the necessary adjustment measures.
But economists fear the respite may prove all too brief for the bond markets, mainly because they believe the 440-billion-euro EFSF is not big enough to intervene on a sufficient scale.
Meanwhile, Germany announced that it has ruled out enlarging the fund, causing a rapid dip in the markets.
Economists at Commerzbank believe that the easing of rates will only last two days and recalled how, despite the ECB's intervention in Greece, Ireland and Portugal, their borrowing rates climbed double digits.
"The ECB decision is no silver bullet, particularly in a globalised, macro-economic environment and with the impact of the US credit rating downgrade which is difficult to estimate," said Gilles Moec.
The current crisis has however driven European leaders to "create further financial solidarity between its members, and to shatter taboo after taboo while getting there," the economist said.
© 2011 AFP