ECB breaks shaky new ground with state debt purchases

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The European Central Bank broke bold new and potentially shaky ground Monday by announcing plans to buy eurozone public debt as part of a rescue plan dubbed the "3-D version of shock and awe" by one analyst.

As part of its contribution to a 750-billion-euro (close to a trillion dollar) bailout for troubled eurozone economies, the ECB said it will intervene "in the euro area public and private debt securities markets to ensure depth and liquidity."

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.

Buying government debt is a step the central bank has fiercely resisted, and ECB president Jean-Claude Trichet said Thursday it was not even discussed at a meeting of the bank's governing council in Lisbon.

Analysts agree the move is needed to provide breathing space until the lion's share of the rescue package, 440 billion euros, is approved by national parliaments, but it also seems like 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.

He called the overall European Union/International Monetary Fund rescue plan "Shock and awe - the 3-D version."

The amount of central bank funds was not detailed, "which leaves the ECB with complete freedom to act," RBS economists said.

The central bank stressed however that it would carry out other operations through its Securities Markets Programme "to sterilise the impact" of the interventions.

That means the ECB will sell an equivalent amount of government bonds it is holding as collateral against loans, or other financial instruments it could create, to ensure "the measures will not affect the stance of monetary policy," according to its statement.

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

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

Those measures include the resumption of unlimited loans of central bank funds for three and six months, exceptional actions the ECB had begun to phase out as financial markets returned to normal.

Central banks in 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, and Japan could join those efforts, the ECB said.

The decisions show ECB policymakers are loading their big guns in addition to bringing out a new one to fight the biggest challenge ever faced by the 16-nation eurozone.

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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