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ECB buys record EUR 22bn of government bonds

15 August 2011, 19:05 CET
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ECB buys record EUR 22bn of government bonds

ECB - Photo Martin Stahl

(FRANKFURT) - The European Central Bank (ECB) said Monday it bought a record 22 billion euros ($32 billion) of government bonds last week, trying to ease a eurozone debt crisis threatening Italy and Spain.

The ECB announced earlier this month that it would resume its bond buy-back programme, which it suspended five months ago, to help eurozone countries hard hit by financial market volatility as they struggle to stabilise their public finances.

This brings to 96 billion euros the total amount the ECB has so far devoted to the programme.

The ECB, as usual, did not specify Monday whose government bonds it had bought but traders last week said it was intervening in support of Italian and Spanish bonds.

The previous record buy-back week was when the programme was first introduced and the ECB bought 16.5 billion euros worth of government bonds.

Economists expect the ECB to continue its buy-back programme over the coming weeks in the run-up to implementation of new measures to strengthen the intervention capacity of the European Financial Stability Fund (EFSF).

Traders sent the yields and risk premiums on Spanish and Italian bonds to record highs in early August, threatening the rest of the eurozone with debt contagion and raising the prospect that the third- and fourth-largest eurozone economies might even need a bailout after Greece, Ireland and Portugal.

The ECB's announcement that it was intervening on the markets helped ease the pressure on Italy and Spain, forcing down their cost of borrowing.

The ECB move comes as German Chancellor Angela Merkel faces pressure from other members of the 17-strong eurozone club to allow the introduction of eurobonds to pool debt risk among financially weak and strong member states.

The idea of eurobonds issued and guaranteed by countries with better credit ratings has long been floated as a way of helping debt-saddled Greece and other struggling eurozone members.

But Germany opposes their introduction as it believes this would increase its own borrowing costs and allow other countries to avoid implementing much-needed economic reforms and tighten up on fiscal discipline.

The EFSF is supposed to take some of the borrowing strain once national parliaments have agreed to measures taken by eurozone leaders at a meeting on July 21. This is expected to happen by late September.

"But it might still take weeks, or even months, before the fund is able to help Italy," according to Joerg Kraemer, chief economist at Germany's Commerzbank.

"In the meantime the ECB is the only institution capable of buying Italian government bonds and guaranteeing refinancing for the country if private investors decided to jump ship," he added.

Italy, which is to issue new bonds at the end of August, must raise 15-20 billion euros every month to pay its way and cover maturing debt.

Italian private investors are expected to buy in to the bond issue but it would be "difficult" for the country to do without foreign investors who over the past years have bought up about half the bonds sold, Kraemer added.

A number of European financial institutes have recently been selling large amounts of Italian bonds. Deutsche Bank, Germany's leading bank, reduced its exposure to Italian bonds from eight billion euros in late 2010 to less than one billion euros at the end of June.

Spain has also been hard hit by market attacks on its bonds.


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