ECB bond buying steadies euro markets for now
Financial markets steadied on Friday as the European Central Bank continued to buy euro zone government bonds in moderate amounts to counter a destabilizing rise in peripheral countries' borrowing costs.
EU paymaster Germany meanwhile rebuffed calls from Spain, one of the euro area states in the markets' firing line, for a closer fiscal union to underpin European monetary union.
There are no plans and there is no desire for a joint fiscal policy, Chancellor Angela Merkel's spokesman told a news conference.
Despite weeks of market turmoil, ECB President Jean-Claude Trichet said there is no crisis of the euro as a currency but hinted that euro zone governments should increase the size of their financial safety net to calm markets.
It is extremely important that what is being done by governments, whether it is their national fiscal policies or structural reform policy, whether it is the collegial collective action that we might have including through the stabilization fund (...) is commensurate to the dimension of the challenges, he told the European American Press Club in Paris.
Bond market traders said the ECB bought several relatively small chunks of Portuguese and Irish bonds on Thursday and was back in the market on Friday, bringing down the risk premium on all peripheral countries' bonds over safe-haven German 10-year Bunds.
Trichet's ECB colleague, Ewald Nowotny, said the ECB had used its bond-buying program energetically this week.
But there was no sign of the shock and awe scale of purchases that some analysts said it would take to halt mounting pressure on euro zone sovereigns that is squeezing Portugal and Spain after forcing Greece and Ireland to seek bailouts.
It remains to be seen whether the ECB is really picking up the pace of bond buying, but I wouldn't count on it. They've certainly shown a lack of appetite in the past, said Everett Brown, strategist at IDEAglobal in London.
Spanish, Portuguese and Irish bond yields edged down and the cost of insuring peripheral euro zone debt against default fell marginally. [ID:nWEA5797] The euro was steady at around $1.3250, well above the three-month low it hit on Tuesday, and European shares were also slightly up. [ID:nLDE6B20OQ]
But whether the ECB's show of deterrence and Trichet's hints of possible firmer action will be enough to stop market wildfire spreading across the euro zone remains uncertain.
So far, politics has lost out against the market. What is needed now is a clear, unambiguous solution that makes the market realize the political will to keep the euro is so big that speculation and panic can be turned off, said economist Andreas Scheuerle at Germany's DekaBank.
S&P CRITICISES EU PLAN
The fragility of European governments' efforts to stem the debt crisis shaking the 16-nation single currency area was underlined when credit ratings agency Standard & Poor's said on Thursday it may cut Greece's BB+ rating in three months' time.
S&P singled out German-driven EU plans to make private bondholders share the burden of any future default by a euro zone sovereign after 2013 as one reason for its decision.
A statement by EU finance ministers that future rescue loans by European governments would have seniority over all other creditors except the IMF reduced the prospects of private bondholders being repaid in full, it said.
Trichet, who has voiced concern about making private bondholders share losses in any future default, said on Friday that EU governments must state clearly they will not seek haircuts and debt restructuring as a condition for giving aid.
Spanish Economy Minister Elena Salgado said her country, which has rushed out new privatization plans to pacify markets, was definitely not next in line for outside assistance.
She also told BBC radio that the European Union could not have a common currency without a common economic policy and stronger joint economic governance.
Spain has been at odds with Germany over the need for more fiscal solidarity in the euro zone.
German Finance Minister Wolfgang Schaeuble was quoted on Friday as saying European governments had all the means needed to save the euro and could count on global support. He also predicted financial markets' nervousness would gradually ease.
I am totally convinced that we have all the means to preserve the future of the euro as a stable global currency, Schaeuble told French business daily Les Echos.
Asked about financial markets' nervousness despite a weekend deal for an 85 billion euro bailout for Ireland, Schaeuble said: We currently have a concern which does not correspond to reality. But I am convinced that it will disappear as we apply in a consistent manner the decisions which have been taken.
RELIEF
On Thursday, Trichet provided relief for commercial banks in peripheral euro zone countries, some of which are frozen out of interbank lending and have become totally dependent on the ECB for funds, by announcing the bank would continue unlimited funding at its base rate for at least another three months.
And he sought to deter speculation against euro zone debt by reminding markets that the central bank was continuing to buy government bonds and explicitly did not discourage market expectations that it would be stepped up.
Referring to the policy the ECB started after Greece was bailed out in May, he said: The Securities Market Program (SMP) is ongoing, I repeat -- ongoing ... I won't comment on the observations of market participants.
(additional reporting by Leigh Thomas and Nick Vinocur in Paris, Annika Breidthardt in Berlin, Mohammed Abbas in London; writing by Paul Taylor; editing by Mike Peacock)
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