ECB Meets to Quell Debt Crisis
By TODD BUELL And TERENCE ROTH
FRANKFURT—The European Central Bank's policy council meets Thursday amid some expectations that it may resume the purchase of euro-zone government bonds to prevent the debt crisis from spreading to Italy and Spain.
Many market-watchers are doubtful of a major announcement on bond purchasing, but nonetheless will be tuned in for ECB President
Jean-Claude Trichet's post-meeting press conference at 1230 GMT.The ECB is widely expected to hold its key interest rate unchanged at 1.5% at the meeting, after raising rates twice since April.
It has been four months since the ECB last used its Securities Markets Program for selected bond purchases to support weaker government bond markets. But sharp declines in Italian and Spanish government bond prices, sending yields up to dangerous levels, have prompted speculation that the ECB will opt to step back in.
The ECB is the only euro-zone institution that can move quickly enough to stop the debt crisis from spreading out from earlier casualties Greece, Ireland and Portugal. ECB board member Jose Manuel Gonzalez-Paramo said last week that the ECB's bond-buying program is continuing, despite a decision by euro-zone leaders to allow the euro-zone bailout fund—the European Financial Stability Facility—to directly buy sovereign bonds in the secondary market. Nomura economists in a research note Thursday said that reactivation of the SMP was a possibility because of delays in processing the changes to the EFSF mandate.
"Amid the turmoil that is gripping the markets due to expanded EFSF implementation risks, they might just be tempted to use it as a stop-gap measure," Nomura analysts wrote. "Such a stance would be a near-term positive for Italy and Spain in particular."
The ECB only reluctantly set up the SMP program in May 2010, amidst an existential crisis for the euro as Greece was on the verge of default, because it doesn't like to indirectly provide funding to governments by buying its bonds. But the ECB would have no choice if the big economies of Italy and Spain were threatened with a fiscal meltdown.
"It is difficult to pinpoint the threshold at which the ECB would revive its SMP program, but we are convinced that the ECB will ultimately prevent any systemic event related to Spain or Italy," said Goldman Sachs economist Dirk Schumacher.
Other market watchers were more doubtful that the ECB would publicly announce the restart of an existing program, particularly when it can get its message out by simply resuming bond purchases. The Royal Bank of Scotland, for one, is skeptical of any further indication coming after Thursday's ECB policy meeting. Instead, Mr. Trichet is likely to defer to plans for the EFSF facility to take that role.
"An ECB intervention might be forced later this year, but we do not see this happening anytime soon," RBS analysts said in a note.
But it hasn't gone unnoticed that a number of ECB officials have changed travel plans this week to attend Thursday's meetings, without giving any indication why.
Bank of Italy Governor and ECB Governing Council member
Mario Draghi changed plans and will now attend Thursday's meeting of the Governing Council, a person familiar with the matter said. The change of plans comes amid rising market tensions surrounding Italy. Mr. Draghi had met Tuesday in Rome with Italian President Giorgio Napolitano after the head of state postponed his vacation and asked to be briefed.
Mr. Draghi isn't the only ECB policy-council member to have changed plans recently. After telling journalists that he would be away for two weeks from the end of July, the Bundesbank confirmed Wednesday that its head, Jens Weidmann, would, in fact, take part in Thursday's council meeting. The bank, however, didn't specify why Mr. Weidmann was returning.
The Dutch National Bank also has confirmed that its head, Klaas Knot, would interrupt his summer holiday to attend the ECB meeting.
The ECB is widely expected to hold interest rates unchanged in order to await clearer signs on the economy. Mr. Trichet should offer clues on rates early in his introductory statement. If he says the monetary policy stance is "accommodative" and that the bank continues to monitor "very closely" developments related to risks of rising inflation, then another rate rise this year is likely.
(The Wall Street Journal)
.
