ECB buys time with strong Spanish sale

THE euro rose to a three-week high against the Swiss franc and regained some of the ground lost to the dollar after successful bond auctions in Spain and Italy yesterday.

However, with strong suspicions that the European Central Bank (ECB) is buying up bonds to keep a lid on yields, the relief is likely to be a mere stop-gap until markets pass a verdict on the package being put together for February’s European Council meeting.

Officials have promised a “comprehensive” package to solve the Eurozone’s debt crisis, with further borrowing facilities expected to boost the size of the region’s bailout funds. The ECB is thought to be buying time until this package is unveiled.

The signs were yesterday that the bank’s actions have convinced bond investors in the short-term. Spain sold €5bn (£4.2m) of five-year debt, with demand strong, but the country was forced to pay nearly a one per cent premium compared to its last auction, with yields at 4.5 per cent versus 3.6 per cent in the last sale. Italy also saw strong demand for its €6bn sale of debt but similarly had to pay a premium compared to its previous sale.

Meanwhile, European leaders are meeting behind the scenes in an attempt to gain the initiative.

ECB president Jean-Claude Trichet called, once again, for the Eurozone’s bailout facilities to be boosted “quantitatively and qualitatively”.

Germany and France are known to be against bankrolling a further expansion in the fund, but there were signs that Germany’s position might shift if chancellor Angela Merkel could be convinced that the survival of the currency union is at risk.

She said this week: “We support whatever is needed to support the euro, also with respect to the rescue fund.”

Mike O’Rourke of brokerage BTIG said: “It sounds as if the German chancellor spent the holiday season with Fed chairman Ben Bernanke.”