ECB defends bond buying scheme

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The European Central Bank on Thursday insisted that its government bond buying scheme was "essential" to reducing tensions in eurozone financial markets.

The bank said in its latest monthly report that the ECB governing council "considers the mechanism ... essential in order to ensure the effectiveness of the monetary (policy) transmission system."

The ECB said early Monday it would intervene in securities markets to buy government and private debt, a move that represents unprecedented and controversial support for troubled eurozone governments.

The initiative was aimed at halting speculative attacks in the eurozone and restoring stability to bond markets.

Borrowing costs on such markets had soared for certain countries -- notably Greece -- burdened with heavy debts and big public deficits.

While providing critical breathing space for eurozone countries that face mounting problems getting financing on the capital markets, the decision raised questions in some quarters about the ECB's independence from political influence.

The head of the bank, Jean-Claude Trichet, responded on Monday by telling reporters in Basel, Switzerland: "We are fiercely and totally independent."

"This decision is the decision of the (bank's) governing council and not the result of any kind of pressure of any sort."

The ECB report maintained that its purchases would be "sterilised" by other ECB operations.

The central bank would sell an equivalent amount of government debt it already holds as collateral against loans, or other financial instruments it could now create, to balance out the purchases.

The aim would be to prevent an increase in the eurozone money supply that would fuel inflation.

-- Dow Jones Newswires contributed to this report ---

© 2010 AFP

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