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08 August 2011

WSJ: ECB moves to prop up Italy, Spain


The European Central Bank signaled it would purchase government bonds of Italy and Spain on a large scale, in the most dramatic and controversial escalation of its nearly two-year effort to stem Europe's unfolding debt crisis.

ECB intervention to prop up Italy and Spain is a watershed in Europe's handling of the financial crisis. The central bank has so far insisted that the main responsibility for action lies with national governments. A decision to buy Italian and Spanish bonds is tantamount to conceding that the euro's Member States are unable or unwilling to respond effectively, turning the ECB into the lead firefighter—and the eurozone's lender of last resort. That could reshape the future of Europe's monetary union. The ECB said it will "actively implement" its bond-purchase programme, which had been mothballed for more than four months before officials resumed purchases of Irish and Portuguese bonds last week.

The ECB statement, released late Sunday, didn't specifically mention Spanish and Italian bonds. But the implication was clear: after more than one year of on-and-off activity in the bond markets of its weakest countries, the ECB is acting to keep the Greek debt crisis from engulfing its biggest economies. In order to stem contagion meaningfully to Spain and Italy, the ECB will have to ramp up its bond purchases significantly, most analysts say—a step it has been reluctant to take. It has purchased fewer than €80 billion of Greek, Irish and Portuguese bonds since the programme began in May 2010.

The ECB hopes that Europe's €440 billion crisis fund, the European Financial Stability Facility, will soon take over bond-buying responsibilities. But many analysts say that, at its current size, the EFSF doesn't have the firepower to shield Spain and Italy. RBS economists estimate that around €850 billion of Italian and Spanish bonds must be bought to alleviate pressure in their bond markets. "The risk of political fallout will be large", RBS warned. Bigger euro bloc countries such as France may balk at increasing their exposure to the region's fragile periphery through an expansion of the EFSF.

Full article



© Wall Street Journal


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