TRICHET’S GAMBLE

 
Julian Harris
Follow Julian
ECB POISED TO BUY SPANISH AND ITALIAN BONDS

THE European Central Bank (ECB) last night signalled that it will start buying Spanish and Italian bonds in a desperate attempt to stop the rot spreading to the third- and fourth-largest Eurozone economies.

“The ECB will actively implement its Securities Markets Programme... to ensure price stability in the euro area,” ECB President Jean-Claude Trichet said in a statement late last night following an emergency conference call of the bank’s governing council.

The statement, which called on the Italian and Spanish governments to “adhere strictly to agreed fiscal targets”, made it clear that any purchase of their bonds was contingent on them cutting their deficits through structural reforms.

Trichet added it was “essential” that the new Eurozone bailout fund, the European Financial Stability Fund (EFSF), was quickly implemented. It will take over the role of bond buyer of last resort once fully operational.

However, it appears that Trichet’s intervention will do little to stem plummeting equity markets. This morning, the Nikkei in Japan opened down 1.7 per cent, setting the scene for what is set to be another turbulent day of trading, as markets deal with the twin blow of the US downgrade and Eurozone debt crisis.

The New Zealand stock exchange fell more than three per cent in early trading to hit an 11-month low.

Martin Slaney of GFT was cynical about the effects of Trichet’s measures on global markets. “The ECB may well intervene in the Spanish and Italian bond markets, but I don’t see that encouraging many to consider catching the proverbial knife,” he said.

Earlier in the evening a source said that if the ECB council opted to intervene in Italy, the ECB and national central banks would start buying Italian bonds when European markets open today.

The Bank’s bond purchases are “doomed to failure unless backed by credible moves either to save the euro or to break it up,” said Douglas McWilliams of the Centre for Economic and Business Research.

“Saving the euro means a fiscal union, which would give the justification to the Germans to pay off Italian and Spanish debts. Even then I am not sure that the German electorate would stand for it but if it works politically, it is a plausible policy economically,” McWilliams added.

Trichet last week announced the ECB had resumed its purchases of government bonds in the secondary market after an 18-week hiatus. But its decision to restrict such purchases to Irish and Portuguese bonds led to sharp declines in the price of bonds from Italy and Spain, where borrowing costs soared to 14-year highs.

In the US, stock futures sank more than 2.5 per cent for all three major indices yesterday, after Standard & Poor’s downgraded the country’s triple A credit rating once markets had closed last week.

Gold, seen as a haven from the spiralling chaos, hit a fresh record high of $1,692 an ounce.