ECB Reactivates Anticrisis Measures

The Wall Street Journal

By GEOFFREY T. SMITH

LONDON—The European Central Bank reactivated two of its most potent anticrisis measures Thursday in an attempt to stop the debt crisis from reaching Spain and Italy.

At the bank's monthly news conference, ECB President Jean-Claude Trichet announced that it would offer a six-month tender of unlimited size next week. At the same time, traders reported, the ECB re-opened its program of government bond buying for the first time in five months, although Mr. Trichet didn't confirm that directly. Mr. Trichet was coy about the re-opening of the Securities Markets Program, repeating merely that the program is "ongoing" and that "you will see what we are doing." As he spoke, traders in London reported that the ECB was in fact buying the government bonds of Ireland and Portugal, in what would be the first such intervention since March.

The bank's actions come as the debt crisis has threatened to spread from smaller, peripheral economies such as Greece and Ireland to the much larger and systemically more important economies of Italy and Spain. However, the traders' reports suggested that the ECB was still not prepared to start supporting the much larger Spanish and Italian debt markets.

In response to questions, Mr. Trichet acknowledged that some members of the governing council hadn't supported the decision on bond buying, but said there was an "overwhelming majority" in favor.

In addition to the six-month tender, Mr. Trichet said the bank would keep its policy of lending unlimited amounts at its one-week, one-month and three-month operations until the end of the year. The ECB hadn't been due to decide its liquidity policy for the fourth quarter until next month. The ECB had used both six-month and 12-month tenders at the height of the financial crisis to ensure that banks could guarantee to keep themselves liquid if they lost access to wholesale funding markets. There have been anecdotal signs of such stress re-emerging in recent days.

Mr. Trichet's comments provoked choppy trading in the euro and in euro-zone debt markets, which struggled to synthesize them into a consistent whole. The euro had started the press conference at $1.4234, fallen to $1.4151 on the announcement of the six-month tender, rallied on the reports of the bond purchases and then weakened again on the admission that there is still resistance to them within the governing council. When Mr. Trichet wound up, the euro was at $1.4170.

Likewise, the 10-year Italian and Spanish bond yields started and finished the press conference at 6.10% and 6.18% respectively, but rallied and faded in the meantime.

The market tensions that led the ECB to act Thursday had already spread beyond the euro zone, with "safe haven" flows into the Swiss franc and the Japanese yen causing those countries' central banks to intervene in local currency markets to stop them appreciating any further. Mr. Trichet stressed, however, that the ECB's actions Thursday weren't coordinated with other central banks

Earlier, the ECB left its benchmark interest rate unchanged at 1.5%. Mr. Trichet gave no indication that the ECB would hold off from further interest-rate rises in the near future, saying that policy is still "accommodative".

He warned that risks to the medium-term price outlook "remain to the upside" and that "monetary liquidity remains ample and may facilitate the accommodation of price pressures."

Mr. Trichet's assessment of the economic outlook was only slightly more pessimistic than the previous month's. "Continued moderate expansion is expected in the period ahead," he said. "However, uncertainty is particularly high."

Mr. Trichet repeated his familiar exhortations to euro-zone governments to do more to bring their budget deficits down faster, and to implement more structural reforms to raise their countries' growth potential. He stressed the need to "front load" such steps as far as possible.

"It's urgent for all ... and for Italy of course," Mr. Trichet said. Doubts over Italy's ability to master its debt problems haven't been assuaged by the medium-term fiscal plan passed by parliament last month, partly because many of the proposed measures won't take effect for two or three years.