SPANISH government borrowing costs dropped yesterday on hopes that the European Central Bank (ECB) could announce further bond buying to cap yields at safe levels, even though the ECB denied the claims.
Germany’s Bundesbank made clear its opposition to any such scheme, arguing that bond-buying amounts to the central bank financing government spending – something the ECB is not allowed to do.
Yet yields on Spanish 10-year bonds dropped, ending 16 basis points down at 6.28 per cent.
Some economists had hailed rumours that the ECB was set to help troubled governments, arguing it represented the most effective way of reducing pressure on states’ finances.
“The hope would be that, simply by making an explicit pledge to keep yields below particular levels, the ECB might reduce the chances that it will actually have to wade into the bond market,” said Capital Economics’ Jonathan Loynes.
“To be credible, the ECB would quickly have to back up its pledge with hard cash, and any commitment to potentially unlimited purchases would probably require the central bank to undertake full-blown quantitative easing too. Throw in the issues of monetisation of debt, and this idea appears to be a non-starter,” he added.
And an ECB spokesperson hit out at the rumours: “It is absolutely misleading to report on decisions which have not yet been taken and also on individual views which have not yet been discussed by the governing council.”
The Bundesbank added that it “remains critical of the purchase of euro system sovereign bonds”.