Trichet fails to convince

Julian Harris
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MARKETS were unimpressed yesterday after European Central Bank president Jean-Claude Trichet attempted to calm fears over the debt crisis by announcing a return to its bond buying programme.

Denying that the Securities Markets Programme had been frozen, Trichet told reporters in Frankfurt: “We were not unanimous but we were an overwhelming majority on the operation with regards to bond purchases.”

Trichet said he “would not be surprised” if bond purchases were underway during the conference itself, despite inaction for over four months.

Yet a Eurozone monetary source said the European Central Bank was only planning to buy Portuguese and Irish bonds.

“We fail to understand the logic of the ECB purchasing yet more Irish and Portuguese bonds at the current juncture when both countries are fully financed under a European Financial Stability Fund and IMF programme until at least 2013,” commented Tobias Blattner of Daiwa Capital Markets in a note.

Investors had expected the ECB to reassure markets that it would act to prevent contagion across the 17-nation single currency area; yet analysts said that growing concerns over Spain and Italy remain unaddressed.

Yields on government bonds dropped after Trichet announced ECB bond purchases, yet rose again once cynicism crept in.

Spanish 10-year yields touched 6.33 per cent yesterday, while Italian 10-year yields printed nearly 6.23 per cent – above the six per cent crisis line, and edging up to the seven per cent mark that would technically see Italy requiring a bailout.

The 10-year Italian/German bond yield spread widened to 392 basis points, the most since the launch of the euro in 1999.

Trichet was speaking after the ECB confirmed that it would keep interest rates at 1.5 per cent, in a notably less hawkish statement than in previous months.

“After keeping the door open last month, the ECB have firmly shut it, with rates likely to remain the same for some time due to the economic uncertainty in the region,” said Moneycorp’s Chris Redfern. “The euro has been remarkably resilient up to now but cracks have started appearing recently.”