Debt crisis pushes ECB into policy minefield: analysts

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The eurozone debt crisis pushed the ECB into a policy minefield Monday as it unveiled public debt purchases as part of a massive bail-out dubbed the "3-D version of shock and awe" by one analyst.

As part of a 750-billion-euro (trillion-dollar) rescue package for eurozone economies, the European Central Bank will intervene in "public and private debt securities markets to ensure depth and liquidity," a statement said.

The rescue plan "is the biggest ever attempt to support Europe," RBS analysts noted, and dwarfs an estimated 13 billion dollars -- even when adjusted for inflation -- spent on the benchmark postwar Marshall Plan.

Economists said the European Union (EU) and ECB had picked the "nuclear option" of buying government debt, a controversial step the central bank had staunchly resisted.

Spokespeople for the German and French central banks, which are ECB members, said Monday they had started to buy such debt, without giving details.

On Thursday however, ECB president Jean-Claude Trichet said the move was not even discussed at a meeting of the bank's governing council in Lisbon, though he had not excluded the option.

Analysts agree the purchases will provide breathing space until the lion's share of the European Union-International Monetary Fund rescue package, 440 billion euros, is approved by national parliaments.

It could nonetheless also be a nail in the coffin of ECB independence.

"It will be hard not to see this as a loss of credibility and independence for the ECB," UniCredit chief economist Marco Annunziata said, since it raises the issue of whether the bank will now simply fund excessive government debts.

Annunziata called the overall EU-IMF rescue plan "Shock and awe - the 3-D version" with "a more impressive array of special effects."

By most accounts, the innovative feature is the ECB's unprecedented decision to buy public and private debt, the amount of which was not detailed.

ING rates strategist Padhraic Garvey said the final sum was "potentially limitless" and added that while that will underpin debt markets, it "does taint the ECB politically."

Others noted the central bank would carefully pick the debt it buys after identifying problems in financial markets and stressed the purchases would be "sterilised" by other ECB operations.

That means the central bank will sell an equivalent amount of government bonds it already holds as collateral against loans, or other financial instruments it could create, to balance out the purchases.

Inflation could take off if the central bank simply printed more euros to buy Greek, Portuguese or Spanish bonds from banks for example.

"Markets will closely watch how the ECB defends its independence in this delicate situation," Commerzbank chief economist Joerg Kraemer commented.

The ECB said it would take other measures as well to boost liquidity amid fears that interbank lending markets are seizing up again as they did following the collapse of the US investment bank Lehman Brothers in September 2008.

They included the resumption of unlimited loans of central bank funds for three and six months.

Central banks in Japan, Britain, Canada, Switzerland and the United States will reopen swap lines with the ECB to provide eurozone banks and businesses with ample supplies of dollars.

Deutsche Bank economist Gilles Moec told AFP the question of central bank credibility and independence would depend on how quickly the bank can revert "to an orthodox stance."

Bank governors were forced into the decisions, "but they clearly don't like it," Moec said before adding: "It's not something that is sustainable on a very long-term basis."

© 2010 AFP

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