ECB Nearly Halts Government-Bond Purchases
FRANKFURT—The European Central Bank nearly halted its purchases of public debt last week, buying only €300 million ($387.8 million) in government bonds, in the clearest signal to date that its controversial program to support vulnerable euro-zone countries is in its final stages.
Last week's bond purchases by the ECB involved by far the smallest amount since the bank started purchasing bonds issued by Greece, Portugal and others on Europe's troubled periphery on May 10. After buying more than €16 billion the first week, amounts have steadily dwindled, falling below €1 billion two weeks ago. In total, the bank has bought €60 billion in government debt since early May.
There have been signs of reduced stress in European financial markets.
The decision to vastly scale down debt purchases comes amid signs of reduced stress in European financial markets in recent weeks. The euro has rebounded from four-year lows against the U.S.dollar and is trading at close to $1.30. Evidence that highly indebted Greece is ahead of its ambitious deficit-reduction target for this year has also helped calm investors' nerves somewhat.
ECB officials increasingly see the euro zone's economic recovery as durable and have ruled out the possibility of a double-dip recession, despite their expectations of slower growth in the second half of 2010.
Still, some analysts question whether the ECB is pulling the plug on bond purchases too soon. Yields on 10-year Greek bonds remain above 10%, not much below where they were in early May, when the ECB started buying government debt.
One worry, analysts say, is that if stress-test results from major European banks later this week rekindle worries about the region's banking system, then the ECB might be forced to increase the pace of its bond purchases again. That could, in turn, damage investors' confidence in the ECB's ability to stay in front of the crisis, particularly after a series of policy reversals earlier this year.
"We're still not in a normal situation, and I think the ECB is a little bit ahead of itself in heading for the exit," says Ken Wattret, chief euro-zone economist at BNP Paribas. "I wonder whether the ECB isn't getting a little carried away about the good news on the economy," he said.
Officials have been publicly eyeing the exit since the ECB's last meeting on July 8. ECB Executive Board Member Jürgen Stark, part of the German contingent within the ECB that expressed concerns about the debt-buying program in its early days, said recently that "if the situation [in financial markets] improves further, there is not a reason anymore to continue with this program."
In a Wall Street Journal interview last week, Bank of Luxembourg governor Yves Mersch suggested Athens' recent sale of six-month Treasury bills–its first debt sale since Greece accepted a €110 billion bailout from the European Union and International Monetary Fund in early May—was the type of "encouraging" signal that could lead ECB officials to wind down purchases of Greek debt.
Purchasing government debt was the most controversial act in the ECB's 12-year history. It exposed a rift between the central bank and Germany. Germans worry that by increasing the money supply, debt purchases could be inflationary. The ECB has vowed to keep the money supply stable by offsetting, or sterilizing, its bond purchases by taking more interest-bearing deposits from commercial banks.
Some economists think that having already crossed such a controversial threshold, the ECB should have used the program more aggressively to stimulate the economy. "My fear is that the ECB had missed an opportunity to intervene on a larger scale and bring longer-term interest rates down," Mr. Wattret says.
Economists also worry that recent signs of economic and financial stability may be fleeting. Although the euro zone is expected to post robust second-quarter gross-domestic-product growth of 3% or higher, at an annualized rate, business surveys suggest the recovery may already be starting to fade as growth weakens in key export markets like the U.S. and China.
(The Wall Street Journal)