Eurozone c.banks buy government bonds to fight crisis

By Krista Hughes and Sven Egenter

BASEL, Switzerland (BestGrowthStock) – Euro zone central banks have begun buying government bonds to help support fractured markets, marking a reversal of ECB resistance to full-scale asset purchases to contain Greece’s debt crisis.

The central banks of Germany and Finland confirmed on Monday that central banks had wasted no time playing their part in a $1 trillion emergency rescue package to stabilize the euro and prevent a sovereign debt crisis spreading across Europe.

“All euro system central banks will be involved in carrying out the purchases,” a Bank of Finland spokesman said.

An Italian banking source said the focus was on purchasing bonds of countries in greatest difficulty.

The ECB said in a statement early on Monday that the step, dubbed the ‘nuclear option’ by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts.

Only last Thursday, after the central bank’s monthly meeting, ECB President Jean-Claude Trichet said policymakers had not discussed buying government bonds.

Boosting its firepower further, the ECB said it would also re-start dollar lending operations and bring back some of the emergency liquidity measures it had started to phase out.

“The European Central Bank decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy,” it said in a statement after European Union finance ministers announced a euro crisis package that with IMF support could reach 750 billion euros.

The scope of the bond purchases is yet to be determined, but the ECB said they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected.

Under the plan, agreed late on Sunday, the ECB will buy and sell both government and private bonds on the secondary market.

The euro rallied above $1.30 and European shares shot up six percent, while the premium investors demand to hold Greek government bonds plummeted by nearly 600 basis points after the rescue package was announced.

“This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion,” Marco Annunziata from UniCredit Group in London said of the overall deal.

“Not only is the headline number stunning, but the ECB’s decision to intervene in the secondary market should offset concerns about the time it will take to deploy the stabilization funds.”

The fact that the bond purchases will be offset by liquidity absorbing operations means they will not have the same potential impact on inflation as straight purchases, such as those undertaken by the U.S. Federal Reserve and the Bank of England.

International Monetary Fund chief Dominique Strauss-Kahn said market reaction to the “bold steps” was heartening.

“I think we have to wait a little more, but I think all this is rather encouraging,” he said.

LIQUIDITY HOSE

In its early-morning statement, the ECB said it would hold its next two three-month liquidity operations at a fixed interest rate, rather than the planned competitive tenders.

It will return to six-month loans, offering banks all the money they ask for on May 12 at a fixed interest rate linked to the main refinancing rate.

European laws prevent the ECB from buying debt directly from governments in the way the U.S. and British central banks have done during the financial crisis, but not on the secondary market.

The ECB announced a 60 billion program to buy covered bonds last year but this will be its first foray into buying government debt.

Greece’s debt crisis has driven the cost of its sovereign debt and its insurance to record levels. The problems have also started to push up debt costs for other euro zone members with strained public finances such as Portugal, Spain and Ireland.

Stock Market Today

(Additional reporting by Catherine Bosley; Editing by Mike Peacock)

Eurozone c.banks buy government bonds to fight crisis