European Central Bank President Jean- Claude Trichet started buying Italian and Spanish assets today in his riskiest attempt yet to tame the sovereign debt crisis.
Italian and Spanish bonds surged as the ECB entered the market, sending 10-year yields down more than 70 basis points. The euro rose to $1.4355 U.S. in Frankfurt from $1.4277 U.S. at the close of European trading on Friday.
With governments failing to act swiftly enough to stop contagion from Greece’s fiscal meltdown, it has fallen to the ECB to battle a crisis that’s now threatening the survival of the euro. Buying Italian and Spanish debt may require the ECB to massively expand its balance sheet and open it to accusations of bailing out profligate nations, breaching a key principle in the euro’s founding treaty and undermining its credibility. Germany’s Bundesbank opposes the move.
Italy has 1.8 trillion euros ($2.6 trillion U.S.) in outstanding debt. The ECB bought Italian and Spanish bonds this morning, according to five people with knowledge of the transactions, driving their 10-year yields down to 5.39% and 5.3% respectively from above 6% on Friday. Both reached euro-era records last week.
ECB policy makers were forced to step up their response to the debt crisis after a failure to enter the Italian and Spanish bond markets last week helped fuel a global rout.
Fears of a further slump when markets opened this week were compounded by Standard & Poor’s decision on Friday to strip the U.S. of its AAA credit rating for the first time.
Asian stocks dropped today, extending the worst global slump since the bull market began in 2009.
The Group of Seven nations issued a statement this morning saying it will take "all necessary measures to support financial stability and growth."
In a statement issued in the name of the ECB president after an emergency Governing Council conference call last night, the Frankfurt-based central bank welcomed Italy and Spain’s efforts to reduce their budget deficits and said it will "actively implement" its bond-purchase program.
Since starting its bond purchases in May last year, the ECB has bought about 74 billion euros of assets to help stabilize Greek, Irish and Portuguese markets -- the three countries of the euro area to have received bailouts from the European Union and International Monetary Fund.
Four months ago, the ECB ceased bond purchases and put the onus on governments to find a solution to their debt woes as it turned its attention to raising interest rates to curb inflation. Now it finds itself once again in the vanguard of efforts to overcome the crisis.
