FINANCIAL markets have steadied today as the European Central Bank has continued to buy euro zone government bonds in moderate amounts to counter a destabilising 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 eurozone 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 stabilisation 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 today, 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 programme "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.
The euro was steady against the dollar at around $1.3250, well above the three-month low it hit on Tuesday, and European shares were also slightly up.
City A.M. Reporter