Saturday, November 5, 2011

ECB Bonds Purchases

ECB rate cut was pre-emptive, bond buys temporary -Stark

Fri Nov 4, 2011 10:38am EDT
* Says Draghi made clear bond-buy programme is temporary* Puts onus on governments to tackle crisis via reforms
* Suggests Thursday's rate cut should have been expected
* Sees "strong cooling" of economy

By Sakari Suoninen and Eva Kuehnen

FRANKFURT, Nov 4 (Reuters) - The European Central Bank's interest rate cut on Thursday was a pre-emptive strike, policymaker Juergen Stark said on Friday, and urged the bank to call an early halt to its sovereign bond-buying programme.

The comments by Stark, who will step down from the bank's six-strong Executive Board at the end of the year, signal the ECB is not preparing to cut its key policy rate again this year.

He also stressed that the bank's programme of buying sovereign debt was temporary and dismissed suggestions it should be made permanent even as the ECB faces pressure to ramp up purchases to tackle the euro zone debt crisis.

The controversial programme has increasingly come into focus as the debt crisis has deepened due to uncertainty about Greece's future in the euro zone. Many analysts see ECB bond buying, and the firepower it could unleash, as the only way to steady markets.

Stark is quitting the ECB early this year in what sources have said is a protest against the bond-buying programme.

The ECB's new president, Mario Draghi, said on Thursday the programme was "temporary" and "limited", reiterating the stance of his predecessor Jean-Claude Trichet and suggesting Draghi wants to keep up pressure on euro zone governments engulfed by the debt crisis to reform.

"Mario Draghi made clear that this is a temporary measure and it's no secret that I have never been a particular fan (of the programme)," Stark told a conference in Frankfurt.

"I expect that we should end this programme as soon as possible, because it sets false incentives for member states, for governments to bring their budgets in order."

After the event, Stark expanded on his comments, ruling out making the programme permanent, as was suggested during the Cannes G20 meeting.

"This is not an option," he told reporters.

Stark suggested markets were wrong to have been surprised by Thursday's ECB decision to cut rates to 1.25 percent at its first policy meeting under Draghi.

"Yesterday's decision has nothing to do with pragmatism," Stark said, adding that he made the proposal to cut rates.

"We are witnessing a strong cooling of the global economy and in the euro zone."

But, he also flagged that the ECB plans to keep rates on hold until at least the end of the year.

"We anticipated the deterioration of the economic situation over the next couple of weeks, so this was a pre-emptive decision," the German said. "We never pre-commit, but I would like to stress this was a pre-emptive decision."

Stark's fellow Executive Board member, Jose Manuel Gonzalez-Paramo said on Friday that inflation should remain the central bank's priority.

"Monetary policy must remain focused on its key objective of delivering price stability," he said in Madrid.

Stark's opposition to the ECB's bond buying is based on a belief, shared by many at the central bank, that the onus should be on the crisis-hit countries to make economic reforms and fears that ECB market intervention, which can reduce government borrowing costs, could reduce their incentive to reform.
Stark said euro zone countries receiving aid from their wealthier peers must use that help to put themselves on a stable footing.

"Solidarity is not a one-way street," he said. "It calls for input from both sides, from those who give as well as those who take. The financial support of the donor countries helps the crisis states to buy time to carry out reforms."

ECB bond buying has helped keep surging Italian bond yields in check as Italy's high debt has become a focus of market attention. Italy agreed late on Thursday to allow the IMF to monitor its progress in carrying through economic reforms whose delay has sapped market confidence in the country and ravaged its government bonds.

Draghi, himself an Italian, gave no hint on Thursday that the ECB's bond-buy programme would be accelerated despite the chaos in Greece threatening to engulf the much larger economies of Italy and Spain.

"At this juncture they want to stress that they don't see it as their remit to be the lender of last resort to governments," RBS economist Nick Matthews said of the ECB, adding that the central bank still wanted markets to function in an orderly way to allow the transmission of its monetary policy.

"If the governments are trying to put the Italian politicians under pressure to put in place the necessary reforms, you don't want to let them off the hook by all of a sudden buying huge amounts of their bonds," he added. "So it's a balancing act we've got here."

Matthews expected the euro zone's rescue fund, the European Financial Stability Facility, would have insufficient firepower to restore order to markets, even if it is leveraged to 1 trillion euros, and that the ECB would ultimately have to increase its bond purchases.

"We think that ultimately they will be forced to step up massively their bond purchases in order to prevent a new escalation of contagion risks across the system," said Matthews, who was among a minority of economists who forecast the ECB's rate cut on Thursday.

Italy put under strict IMF and EU surveillance: officials

Posted: 04 November 2011 1832 hrs

CANNES, France - The International Monetary Fund and European Commission will strictly monitor Italy to reassure markets that it is meeting targets to reduce its budget deficit, European officials said on Friday.

But an Italian government source quickly denied that the agreement implied a formal "surveillance" mechanism, and said instead that Rome would seek "advice" from the IMF on the issue.

While it had been agreed earlier the EU's executive would step up monitoring of Rome, European leaders meeting on the margins of a G20 summit had decided to bring in the IMF to increase the credibility of the surveillance and reassure the markets, the senior officials said.

The IMF's advice is expected to play a complementary role to the European Commission's monitoring, added the Italian source.

Investors forced up the Italian government's 10-year borrowing cost to a euro-era record 6.402 percent on Thursday.

The European Central Bank (ECB) was forced to step in and prop up the Italian bond market in August when the rates soared above six percent, a level widely considered by experts to be unsustainable.

It was reported then that the ECB had sent the Italian government a list of policy changes to be made.

After the European Union decided to force investors to take losses on Greek bonds, attention turned to Italy, where the anaemic growth rate makes it increasingly difficult for Rome to manage its debt equal to 120 percent of output.

Italy's government adopted two austerity packages during the summer, but markets have remained sceptical that the measures will eliminate the deficit and boost growth.

At the G20 summit on Thursday, Prime Minister Silvio Berlusconi vowed to stick to Italy's target of balancing the budget by 2013 and that new austerity measures would be fully enacted by the end of the month.

An emergency Cabinet meeting on Wednesday adopted reforms including state asset sales, tax incentives for recruiting workers, measures to boost market competition and the unblocking of billions in aid for southern Italy.

The measures, which still have to go before parliament for final approval, stopped short of major changes such as higher taxes for the wealthy, a one-off levy on current accounts and a housing tax that had been mooted in recent days.

- AFP/ir


My Thots....

The 2 articles represent the dilemma facing Draghi.

A danger that the contagion effects due to Eurozone sovereign debt and banking crisis spreading to, and affecting the economies in the Eurozone, leading to stagnation or even recession.
The danger that countries like Italy may see any aid as a license to be profligate.

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