Europe Bank Extends Emergency Support
By JACK EWING and MATTHEW SALTMARSH
Published: December 2, 2010
FRANKFURT — The European Central Bank on Thursday continued its emergency support to weak countries within Europe but stopped short of more aggressive action to contain the debt crisis that has already engulfed Greece and Ireland.
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Jean-Claude Trichet, the European Central Bank president, said emergency support did not mean an easing of monetary policy.
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Dominique Strauss-Kahn, left, managing director of the International Monetary Fund, with Mr. Trichet at a meeting in Brussels in March. Mr. Strauss-Kahn suggested Thursday in New Delhi that central banks could do more to support growth.
Just months after the central bank indicated that it would wind down its extraordinary loan program to banks, its officials conceded that the program was still needed. Traders said the central bank was also buying Irish and Portuguese debt on open markets on Thursday, continuing a program begun this year and pushing up bond prices and lowering the cost of borrowing for these countries.
Grappling with sharply divergent economic performance by euro area members, the central bank disappointed investors who had looked for more than just a continuation of existing programs and had awaited a signal of a bold expansion of monetary support.
Investors have criticized European governments for a lack of decisiveness during the crisis and had hoped the central bank might step in to fill the void, specifically by broadening its purchase of government bonds through quantitative easing, as the Federal Reserve has done to put cash into the United States economy.
The president of the European Central Bank, Jean-Claude Trichet, said an “overwhelming majority” of the bank’s governing council had agreed to continue the debt purchases begun in May — an admission that the decision was not unanimous. Instead of promising stronger measures, he emphasized that the central bank’s action was “not quantitative easing.”
Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., wrote, “We are disappointed.”
He added, “We see no reason to think any risks — perceived or imagined — arising from the twin crises of Euroland’s sovereign debt and banking sector are reduced by today’s E.C.B. council meeting.”
Mr. Trichet must balance a number of opposing forces. Growth in Germany has been better than expected but contrasts ever more sharply with the results in weaker countries. Germany, Europe’s biggest economy, expanded 0.7 percent in the third quarter, the European statistics agency Eurostat said Thursday. That compared with 0.4 percent growth for the entire euro zone, and a 1.1 percent decline in Greece.
Inflation remains subdued, but the central bank could face a quandary if prices start to rise in faster-growing parts of the euro area. Sworn to keep prices in check, the central bank might have to raise interest rates even while weaker countries still struggle to grow.
The bank’s governing council left its benchmark interest rate unchanged at 1 percent on Thursday, as expected. The bank has stood pat on interest rates since May 2009. Most analysts do not expect an increase until well into 2011.
Asked Thursday at a news conference if diverging growth rates made it more difficult for the bank to develop a monetary policy that is right for all 16 euro area members, Mr. Trichet argued that growth in the strong countries would help the weak members.
“Those parts of the euro area economy that have real gains in competitiveness through hard work can now be a source of growth for the benefit of the euro area as a whole,” he said. The central bank on Thursday revised its forecast for the entire area slightly higher.
Mr. Trichet also faces a divide among bank policy makers much like the one among European governments.
Axel A. Weber, the president of the Bundesbank and a member of the governing council, has criticized the central bank’s bond purchases, and he said that investors should share the burden of future debt and bank crises — a position shared by Chancellor Angela Merkel of Germany but not Mr. Trichet.
On Thursday, Mr. Trichet seemed to reject the role that others often want to thrust on him as the euro’s last line of defense.
Speaking in New Delhi, the managing director of the International Monetary Fund, Dominique Strauss-Kahn, suggested that central banks could do more to support growth.
“Growth is the most important thing,” he said, according to Reuters. “But because of a very high level of public debt, the burden falls on monetary policy.”
Mr. Trichet, however, put the onus on governments rather than the central bank to respond more firmly.
“We need an improvement in the ‘E’ letter of E.M.U.,” he said, referring to European Monetary Union. He added, though, that “observers should never underestimate” European leaders. “When times are very demanding, the Europeans are making decisions,” Mr. Trichet said.
In Brussels, suggestions that the French president, Nicolas Sarkozy, was pushing for an emergency weekend summit meeting were played down. Diplomats said a meeting would be useful only if far-reaching plans were under way.
Financial markets reacted positively on Thursday, apparently cheered by the extended support for banks and reports that the central bank was buying bonds of weak countries.
“As Trichet was speaking, the E.C.B. moved in aggressively, buying Portuguese and Irish bonds,” said Charles Diebel, chief strategist at Lloyds TSB Bank in London. “The E.C.B. is saying, ‘We’re doing as much as we can within our remit. Now it’s over to the governments.’ ” But Mr. Diebel added: “This doesn’t sort out the real, underlying problems in the euro zone.”
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Prices on Italian, Portuguese, Belgian, Irish and Spanish 10-year bonds rose sharply, while the safer German 10-year benchmark issue slipped a touch. Earlier, an auction of Spanish government debt met with firm demand, which also helped improve sentiment.
The euro rose to $1.3210 in New York from $1.3139 on Wednesday.
European stocks rose after the central bank meeting, having slipped earlier in the day. The Euro Stoxx 50 index, a barometer of euro zone blue chips, rose 2.2 percent. The FTSE 100 index in London was up by the same amount.
In Madrid, the Spanish government sold 2.5 billion euros, or $3.3 billion, of three-year bonds at an average yield, or effective interest rate, of 3.7 percent. Though the yield was well above the 2.5 percent the state paid at a similar auction in October, the offering was oversubscribed, showing solid demand. A higher yield suggests that investors were demanding a premium to compensate for a higher perceived risk.
“Trichet tried to calm markets without giving them everything they wanted,” said Carsten Brzeski, an economist at ING in Brussels. “After today’s E.C.B. meeting, turbulence on bond markets is not likely to calm down quickly.”
As of Monday, the European Central Bank had spent 69 billion euros buying government bonds on open markets, a fraction of the Fed’s bond purchases. Unlike the Fed, the central bank “sterilizes” the purchases by taking in the same amount in bank deposits, avoiding perceptions it is printing money and fueling inflation. Mr. Trichet said Thursday that the central bank would continue doing so.
The bank has been trying to reduce the extraordinary support it began extending to the banking system at the height of the financial crisis. But it is clear that institutions in Ireland and some other countries would not be able to function without the unlimited loans that the central bank has been providing.
The bank said Thursday that it decided to continue providing unlimited three-month loans to banks at least through mid-April. Previously, it had committed to providing the low-cost liquidity only until mid-January, making loans to banks at 1 percent interest, provided the institutions could offer collateral.
The bank began buying bonds in May to halt a run on Greek debt. Purchases dwindled after July, but they have increased recently. The bank bought debt worth 1.35 billion euros last week, a level that was still much lower than in May and June, when it spent 59 billion euros buying debt on secondary markets.
The central bank does not disclose what European government bonds it has bought. It reports only once a week, on Monday, on the size of the purchases.
Matthew Saltmarsh reported from Paris. Stephen Castle contributed reporting from Brussels.
A version of this article appeared in print on December 3, 2010, on page B1 of the New York edition.
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