20/12 European Central Bank Reduces Bond Purchases

By THE ASSOCIATED PRESS
Published: December 20, 2010
BRUSSELS (AP) — The European Central Bank sharply reduced its purchases of bonds last week from vulnerable governments like Greece, Ireland and Portugal, despite pressure to do more to help fight the Continent’s crippling debt crisis.
In the week ended on Friday, the central bank spent 603 million euros ($793 million) on government bonds, down sharply from 2.667 billion euros a week earlier, data released Monday showed.
The central bank started its bond-buying program in May, after extending a rescue loan of 110 billion euros to Greece. Buying bonds stabilizes their prices, taking financing pressure off the issuing governments and the banks that hold them.
Purchases were low during the summer, but increased sharply in the first two weeks of December, after a 67.5 billion-euro bailout for Ireland failed to contain turmoil on government bond markets. The increased purchases were widely credited for calming markets in recent weeks.
European policy makers have been putting pressure on the Frankfurt-based central bank to play a more active role as they struggle to prevent the region’s debt crisis from claiming a third victim.
Since May, the central bank has spent 72.5 billion euros on government bonds, a minuscule amount compared with the Federal Reserve’s $600 billion bond-buying program.
On Friday, European Union leaders decided against new measures to tackle the debt crisis, such as increasing the euro zone’s 750 billion-euro financial backstop or creating pan-European bonds.
The central bank signaled last week that it was growing uncomfortable with the risk government bonds were adding to its balance sheet — it asked national central banks to almost double its capital base.
Many analysts have warned that Portugal and the much larger Spain might have trouble handling their debt load, potentially overwhelming the euro zone’s existing financial backstops and endangering the currency area as a whole.