In what appears to be an attempt to quell the growing contagion fears and to provide support to the debt markets, the European Central Bank directly intervened in the bond markets Thursday. The ECB reported that it had purchased Portuguese and Irish bonds in the open market. The move was likely designed to get more cash to banks and to keep rates from rising.
During a press conference following the ECB’s regularly scheduled meeting Trichet foreshadowed the move by saying, “I wouldn’t be surprised that before the end of this teleconference you would see something on the market.”
Just prior to the move, the ECB had announced no change in its monetary policy. Trichet had said that while the bank is reluctant to put aside rate hikes, it does recognize there is a problem. Trichet acknowledged a “particularly high” level of uncertainty, but said that ECB rates are still “accommodative” and inflation risks “remain on the upside,” he said. To global Fed watchers, this is “Central Banker-speak” for “rates are going higher at some point.”
Trichet also said that the ECB will support the euro-area banks without question. The ECB chief said the ECB will lend euro-area banks as much money as they need for six months and extend its existing liquidity measures through the end of the year.
Regarding a question as to why the ECB chose to buy bonds issued by Portugal and Ireland instead of Italy’s, Trichet refused to comment. Recall that Italy is currently the key focus in the Eurozone as rates have risen to 14-year highs and are approaching the levels that required Greece, Ireland, and Portugal to seek assistance from the EU/ECB, IMF bailout fund.
The ECB’s intervention serves as notice that the central bank’s bond-buying program, which has been dormant for four months, is now active again. Trichet told reporters, “I never said myself that it was dormant, I always said that we were totally transparent on what we were doing," he said. "The SMP is fully transparent, so you will see what we do."
Analysts project that the move was likely in response to the enhancements made to the Eurozone’s bailout program (EFSF) late last month.
State of the Market’s Dave Moenning suspects that Thursday’s move by the ECB was a warning shot to hedge fund managers who may be “shooting at” Italy and Spain. And while wars between central banks and the big global macro hedge funds haven’t always turned out well, it appears that Trichet is saying that the ECB will respond.
The other side of the coin is that the move may be viewed by some market participants as a sign of panic by the ECB - or - confirmation that the problem with Italy and Spain is getting serious.
There was little direct reaction by the euro to the ECB’s move to buy Portuguese and Irish bonds. However the currency has moved lower in the last few minutes. It is worth noting that global stock markets continue to see steep losses as a result of the renewed crisis.
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