ECB bond hints awaited, to keep unlimited liquidity

By Sakari Suoninen

FRANKFURT (BestGrowthStock) – The European Central Bank is expected to keep unlimited liquidity operations in place for longer with the euro zone debt crisis raging unabated, but is unlikely to announce mass new bond purchases on Thursday.

On Wednesday, a day after investors unassuaged by a bailout of Ireland pushed the risk premium on Spanish and Italian bonds to euro lifetime highs, speculation grew that the European Central Bank could rush through new anti-crisis measures, including government bond buying on a much larger scale.

Analysts say the ECB may well have to do so if the likes of Portugal and Spain get no respite from the markets but most do not expect more than hints in that direction from ECB President Jean-Claude Trichet after Thursday’s policy meeting.

“Market dynamics make it inevitable that the ECB will have to extend fixed rate term money and buy more peripheral bonds,” said BNP Paribas analyst Paul Mortimer-Lee. “We also want to see a beefed up SMP, but fear we will only get platitudes.”

The ECB started purchasing bonds through its Securities Market Program (SMP) in May and has so far spent 67 billion euros ($88 billion), most of it during the first three weeks of the program.

It has not said what it has bought or how much it intends to spend although traders say it increased Portuguese bond buys this week. Thus, it could hint at picking up the pace without a formal announcement of changes.

“Thursday’s meeting could send the first signal that ECB is on course for stepping up its purchase program,” RBS economist Jacques Cailloux said in a note to investors.

“We continue to look for 100 billion euros of purchase by beginning of next year including Spanish securities.”

Others see much larger intervention — Evolution Securities fixed income strategist Elisabeth Afseth said there could be a 1 to 2 trillion euro bond-buying program.

Debate will certainly be heated in the meeting now underway.

Governing Council member Axel Weber has made his distaste for the program clear and called for it to be scrapped in October, saying it had failed to calm bond markets.

German Economy Minister Rainer Bruederle said on Thursday liquidity would not solve the crisis and that pumping too much money into the economy risked creating new bubbles.


What is more likely is the ECB board will agree that it would send the wrong signal were it to push ahead with phasing-out unlimited liquidity measures now — as had been expected until recently.

And what is absolutely certain is that it will also keep its main refinancing rate on hold at 1.0 percent. All 74 economists in a Reuters poll predicted that this month, and expect on average for them to be raised late next year.

“The ECB doesn’t have the power to solve the current problems but it does have to power to make them worse,” said BNP Paribas economist Ken Wattret. “Removing any of support at this stage is likely to aggravate the situation.”

A euro zone central bank source told Reuters policymakers were split on the liquidity issue and that an increasing number of them saw the need to continue unlimited tenders.

“The situation is even worse on the markets than a few weeks ago, increasing the likelihood that some extraordinary measures may be extended for a certain time after January,” the source said, admitting there were different opinions within the ECB but that the likelihood was unlimited three month funds would be offered “for a longer time.”

In a Reuters poll on Tuesday, 13 of 22 traders said they expected the ECB to continue offering unlimited amounts of cash to banks.

Moving to competitive three-month auctions and overallotting them would not have much of an impact on funding conditions, but doing so right now could be interpreted as blindness to current chaos and add to jitters.


Markets are already discounting an eventual rescue of Portugal. While that would be manageable, assistance for its neighbor Spain would sorely test EU resources and raise deeper questions about the integrity of the 12-year-old currency area.

Trichet is expected to admonish markets for taking an overly pessimistic view of the euro zone’s capacity to solve its problems and brush aside any suggestions the common currency might break apart.

While the ECB was actively ushering Ireland to accept aid from the European Union and the International Monetary Fund, he is unlikely to start pushing Portugal to do the same — for now.

However, Trichet will probably demand EU leaders work more actively to solve the debt crisis.

The 16-country region’s central bank will also publish its latest set of growth and inflation forecasts, which are likely to be nudged up by 0.1 to 0.2 percentage points for this year and next, with Germany still flourishing in stark contrast to Portugal, Spain, Ireland and Greece.

Trichet said on Tuesday euro zone growth had consistently provided positive surprises during the crisis, while his comment that people are underestimating “the determination of governments and the determination of the college that makes up the Eurogroup,” fueled speculation of dramatic ECB action.

(Additional reporting by Marc Jones in Frankfurt and Luke Baker in Brussels, editing by Mike Peacock)

ECB bond hints awaited, to keep unlimited liquidity