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All eyes on ECB to come to eurozone's rescue yet again

24 July 2012, 16:03 CET
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(FRANKFURT) - The European Central Bank may have to ride to the eurozone's rescue again very soon, analysts said Tuesday, as Spain looks set to be the next country engulfed by the never-ending debt crisis.

The long-running turmoil shows no sign of abating, with Spanish borrowing costs soaring to dangerously high levels and bailed-out Greece's rescue programme seemingly on the rocks.

And in yet another blow Tuesday, ratings agency Moody's warned it could strip euro kingpin Germany of its coveted triple-A rating.

Moody's argued that Germany -- Europe's biggest economy which has fared relatively well since the start of the crisis -- faces increasingly incalculable risks in a possible Greek exit from the eurozone and soaring costs of potential bailouts for Spain and Italy.

After Greece, Ireland and Portugal were all compelled to seek aid from their European partners, analysts now see the much bigger economy of Spain possibly as the next domino to fall.

"Without substantial ECB action, the eurozone may soon lose the ability to control the market panic," Berenberg Bank economist Christian Schulz wrote in a note to investors.

In Paris, French Foreign Minister Laurent Fabius said he hoped that Spain would not need a full bailout, but if so, it could require a boost to Europe's rescue fund or ECB action.

Analysts feel the Europe's current anti-crisis strategy is having only a limited effect and the ECB is the only player currently capable of acting fast enough.

With the eurozone's public debt and deficit levels well below those of the United States and Japan, Europe has less of a debt problem than a confidence crisis, the analyst said.

And that was "largely because of the reluctance of its central bank to intervene forcefully in market panics. Moody's rating action may bring the end to this reluctance a little closer," Schulz argued.

Right from the start of the crisis, the ECB has not hesitated to launch a series of emergency measures.

The central bank quickly reversed last year's rate hikes and earlier this month cut eurozone borrowing costs to an all-time low of 0.75 percent.

In May 2010, it embarked on a hotly contested strategy of buying up the bonds of debt-mired countries, known as the Securities Markets Programme or SMP.

And in two long-term refinancing operations (LTROs) in December and February, it pumped more than 1.0 trillion euros ($1.2 trillion) into the banking system to avert a dangerous credit squeeze in the 17 countries that share the euro.

ECB officials have never ceased to repeat that such measures are only temporary and merely meant to buy time for governments to tackle the root causes of the crisis -- profligate spending.

The SMP programme, for one, has lain virtually dormant since February and there were no signs of the ECB reviving it as recently as last week.

But ECB chief Mario Draghi, in an interview with Le Monde at the weekend, said: "We are very open. We have no taboos."

UniCredit analyst Erik Nielsen suggested the ECB could intervene by the end of this week if the situation does not calm down.

The central bank's governing council is scheduled to hold its next policy meeting on August 2.

The quarter-point rate cut at its last meeting was seen by many as too timid, especially as the bank announced no new emergency measures, so markets are waiting to see what Draghi might deliver next week.

A report by the INET Institute for New Economic Thinking, a group of 17 leading economists who make up the "Council of the Euro Zone Crisis," called on the ECB to act.

"The ECB must use all tools (conventional and non-conventional) to ensure a more homogeneous transmission of monetary policy," the economists wrote.

As the International Monetary Fund has suggested, "monetary policy should be accommodative during this emergency period, using both conventional and non-conventional policies to support" economic growth and facilitate the real exchange rate adjustments needed, they said.

Given that the current woes of Spain and Italy were "self-fulfilling fiscal crises, we believe that the ECB could and should be committing to much larger interventions in the market."


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