ECB cuts bond buys to $840 million)

AP News
Posted: Dec 12, 2011 11:39 AM
ECB cuts bond buys to $840 million)

The European Central Bank sharply cut back its purchases of government bonds to only euro635 million ($841 million) last week, underlining its determination to limit its support for indebted governments as they try to dig out of the eurozone debt crisis.

The amount of the purchases, published Monday, compares to euro3.66 billion ($4.9 billion) from the week before, and euro8.58 billion ($11.4 billion) the week before that.

The purchases are a key tool in fighting Europe's debt crisis, because they tend to lower the borrowing costs faced by indebted governments such as Italy, the recent focus of the continent's debt crisis.

But the ECB, the chief monetary authority for the 17 countries that use the euro, has kept the purchases limited despite calls from many economists to buy more. So far the bank has bought around euro207 billion ($274 billion) worth, a small fraction of the outstanding debt of the troubled countries.

The bank says governments like those in Italy and Greece should take the politically difficult steps to get their finances under control themselves _ such as cutting spending and raising taxes _ and not wait for support from the central bank.

Europe is facing a crisis over too much debt in several countries that belong to the euro. Those countries are paying higher interest rates to refinance their debt, that is, to borrow anew to pay off bonds that are maturing, because investors think there is an increased chance they might default. This can become a vicious debt spiral into bankruptcy, where fears of default threaten to become self-fulfilling.

Many economists say the only short-term rescue is for the ECB to buy far more bonds and convince markets there is a lid on Italy's debt costs for now. But ECB president Mario Draghi indicated at the bank's last meeting Thursday that was unlikely. He repeated the bank's adherence to the spirit of the EU treaty, which bars the central bank from financing governments.

The ECB currently describes the bond purchases as a way to steer interest rates, its main function, not as a way to support struggling governments.

Jens Weidmann, the head of Germany's Bundesbank, cast more doubt on the prospect of larger ECB bond purchases by again publicly voicing opposition, saying that large scale purchases with newly created money would be illegal.

"Financing state debts through the money printing press is, and remains, forbidden by treaty," he was quoted as saying by the Frankfurter Allgemeine Zeitung daily.

Weidmann has only one vote on the 23-member ECB governing council, but analysts say that vocal opposition from the central bank of the eurozone's largest country could complicate any effort by Draghi to scale up purchases.

So far the bank buys the bonds with newly created money, but withdraws an equivalent amount by taking bank deposits. It's not clear whether the bank would keep doing that if it bought large amounts.

Both the U.S. Federal Reserve and the Bank of England have been able to use their powers to create new money to try to boost the economy during the financial crisis and recession.

European Union governments except Britain agreed Friday to come up with a new treaty enforcing more scrutiny of country's budgets at the EU level, automatic sanctions for those who violate prescribed deficit and debt levels and calling for laws at the national level restricting deficits. The deal addresses efforts to combat debt over the long term and won't be sealed until March at the earliest, while markets are concerned about countries' ability to borrow in the next several months.

Those fears were evident Monday, as Italy's benchmark 10-year bond yield rose 0.52 of a percentage point to 6.76 percent, getting closer to the 7 percent borrowing rate level that forced fellow eurozone members Greece, Ireland and Portugal into bailouts.