ECB to Intervene in Bond Market to Fight Euro Crisis
Source: Bloomberg, Gabi Thesing, Jana Randow and Simon Kennedy (5/10/10)
"By deciding to go in and buy sovereign and corporate debt, they crossed a line."
The ECB wants "to address severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy," the central bank said in a statement at 3:15 a.m. in Frankfurt. The announcement came less than an hour after European finance ministers unveiled a loan package worth almost $1 trillion to staunch the market turmoil.
Resorting to what some economists have called the "nuclear option," the ECB may open itself to the charge it's undermining its independence by helping governments plug budget holes. Four days ago, ECB President Jean-Claude Trichet said bond purchases hadn't been discussed when members of the bank's 22-member Governing Council met to set interest rates in Lisbon.
By deciding to "go in and buy sovereign and corporate debt, they crossed a line," said David Kotok, chairman and chief investment officer at Cumberland Advisors Inc., which manages about $1.4 billion in Vineland, New Jersey. "The line between fiscal and monetary policy gets blurred."
The euro jumped to $1.2982 at 8:30 a.m. in Frankfurt from $1.2755 at the end of last week.
The ECB said it will intervene in "those market segments which are dysfunctional," suggesting it views the surge in some of the region's bond yields as unjustified and that it's acting to stabilize markets and protect the 16-nation economy.
Investors cited the ECB's initial refusal to consider asset purchases as one reason for the May 7 rout in global markets, which included U.S. stocks falling the most in 14 months amid concern Greece's woes were spreading.