EU Central Bank bought $3.55B in government bonds

BRUSSELS, Belgium — The European Central Bank stepped up its purchases of bonds from governments with shaky finances in early December, but analysts said the bank’s intervention was too small to calm markets fears that the government debt crisis will claim further victims.

BRUSSELS, Belgium — The European Central Bank stepped up its purchases of bonds from governments with shaky finances in early December, but analysts said the bank’s intervention was too small to calm markets fears that the government debt crisis will claim further victims.

Surging government debts have already pushed Greece and Ireland into seeking multibillion bailouts this year, testing the resolve of the 16 countries that use the euro to keep the currency union together.

On Monday, the speaker of the Slovak parliament, Richard Sulik, added to the crisis atmosphere by saying his country needed to be ready to abandon the euro and switch to its former currency if the debt crisis hits further countries.

Although the comments were quickly rejected by the Slovak finance ministry, they are a sign of the opposition to expensive bailouts among some policy makers and citizens of some of the euro area’s more fiscally stable countries.

Slovakia, one of the eurozone’s smallest members, only joined the euro in Jan. 2009, but has already indicated its discomfort with the crisis by refusing to contribute money to a euro110 billion ($148 billion) bailout for Greece by the other euro members and the International Monetary Fund.

The ECB’s reluctance to spend heavily to prevent the crisis from potentially taking down Portugal and Spain — viewed by many as the next weakest link in the currency union — will keep the pressure on European leaders to find a political solution to the debt crisis when they meet Thursday and Friday in Brussels.

Data published Monday showed that the ECB bought euro2.667 billion ($3.55 billion) in government bonds in the week ended Dec. 10. That’s the biggest weekly purchase since July and up from euro1.965 billion a week earlier, but way below the euro4 billion to euro16 billion a week the central bank spent on government bonds in May and June.

By buying up the bonds of vulnerable countries like Greece, Ireland, Spain, or Portugal the ECB stabilizes their prices and yields, or interest rates. Those rates indicate how much a government would have to pay if it were to raise money in the debt markets.

By propping up bond prices, the ECB also takes pressure off banks, which hold government bonds as buffers against financial shocks.

Many market participants think the ECB’s bond purchases have been the main reason for a stabilization in European debt markets this month, but analysts said Monday they might have fallen short of expectations.

“I would imagine that the market will see this as a bit of a disappointment,” Jonathan Loynes, chief European economist at Capital Economics in London, said of Monday’s figure. “It’s helping a little bit at the margins but it doesn’t look like the kind of action that would solve the crisis on its own.”

Jean-Claude Trichet, the head of the ECB, said on Dec. 2 that the Frankfurt-based bank would continue buying the bonds of highly indebted governments, after a euro67.5 billion bailout of Ireland failed to soothe fears that the debt crisis might force Portugal or Spain into seeking international help.

Yields on the bonds from Portugal and Spain fell sharply following Trichet’s statement, but have been creeping up again in recent days.

The yield on Portuguese 10-year bonds closed at 6.29 per cent Monday, down from euro-area highs of around 7.4 per cent in late November but still too high to allow the country to refinance its debts in the long-run. The yield on equivalent Spanish bonds stood at 5.46 per cent Monday, not far off their 5.5 per cent high late last month.

High yields are a sign of investor concern over a country’s ability to repay its debts.

Since the ECB started its so-called Securities Markets Program in May — in the wake of the euro110 billion bailout of Greece — it has bought euro72 billion in government bonds. The ECB started out by buying more than euro16 billion in the first week of the program, but hadn’t spent more than euro2 billion a week since early July.

Even though the Securities Markets Program is modest compared with government bond purchases by other central banks, it was been criticized by several members of the bank’s governing board, who fear that the ECB is yielding to political pressure to use its financial muscle to contain the debt crisis.

Trichet has emphasized that the ECB’s purchases are not intended to bail out overspending governments, but to ensure its monetary policy — focused on keeping inflation in check — reaches the markets.

By comparison, the U.S. Federal Reserve has said it will buy $600 billion in government bonds on the coming months to boost economic recovery.

Some economists have been pushing the ECB to do more to stop the crisis, while others want eurozone governments to increase the region’s euro750 billion ($1 trillion) financial backstop or even issue pan-European bonds.

Even though the euro67.5 billion bailout for Ireland has used to up less than 10 per cent of the total fund — the euro110 billion Greek rescue loan was provided separately — analysts have raised concerns that there might not be enough money to shore up the finances of Spain or Italy, Europe’s fourth and third largest economies.

That concern also appeared to trigger Sulik’s comments in an opinion piece for Slovak business daily Hospodarske Noviny.

Sulik said it was “high time for Slovakia to stop believing in what euro zone leaders say and prepare a Plan B. That is the reintroduction of the Slovak koruna.”

The speaker said Slovakia was too small to influence the how the 16-country eurozone is run, but added: “We must at least protect the values that people living in Slovakia have created.”