THE European Central Bank (ECB) is expected to announce a resumption of its special government bond-purchasing programme today in a desperate bid to stop the spread of the sovereign debt crisis in its tracks.
But the markets are likely to be disappointed by the scale of its intervention, with most analysts saying that the ECB would have to buy gilts on the scale of the Federal Reserve’s $600bn (£384bn) quantitative easing programme to halt the euro contagion.
Capital Economics’ Jennifer McKeown said: “Its purchases have been really small compared to sovereign financing needs. To really make a difference, it would probably need to purchase about €500bn – seven times the size of its purchases so far.”
The ECB has reluctantly stepped up bond purchases slightly in recent weeks and on Tuesday, ECB president Jean-Claude Trichet suggested that it might scale up its activities.
Many suspect the ECB has already increased its intervention in secondary bond markets, for example during yesterday’s auction of Portuguese debt. Evolution Securities’ Elisabeth Afseth said it “wouldn’t be a surprise if they had bought paper ahead of the auction”.
The auction saw strong demand, for €500m of 12-month debt, but Portugal was forced to pay an unprecedented premium for the cash. Yields rose to 5.3 per cent, versus 4.8 per cent just a fortnight ago.
Most observers view these soaring sovereign borrowing costs as unsustainable for the Eurozone’s peripheral members. However, unlike the Fed, the ECB is only permitted to buy sovereign debt in the secondary market.