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By PAN PYLAS, AP Business Writer
LONDON The European Central Bank appears set to keep its special measures to
flood banks with cash and could even step up purchases of government bonds to
help countries contain a debt crisis that threatens to spiral out of control
even after last weekend's bailout of Ireland.
A new boost for the European economy from Thursday's ECB meeting would be a far
cry from what was planned just a week or two ago and certainly was not on the
agenda at last month's gathering.
Expectations the bank will step up its efforts, while keeping its benchmark
interest rate unchanged at the record low of 1 percent, are one sign of how
quickly the debt crisis has sharpened worries that a financially weak member of
the eurozone such as Portugal might join Greece and Ireland in needing a
bailout and, even more dangerous, that larger countries such as Spain might
run into trouble as well.
After last month's policy meeting, Trichet gave every indication that the
central bank was looking at calling time on several props for the financial
system introduced since the crisis took hold in August 2007.
Since Trichet's last post-meeting press conference on Nov. 4, the markets have
dealt the 16-country eurozone a series of blows that have once again called
into question the future of the euro currency itself.
The market pressure grew more and more acute on Ireland, eventually forcing its
embattled government to follow Greece and request a multibillion bailout from
its partners in Europe and the International Monetary Fund.
The response to its euro67 billion ($89 billion) bailout has been lukewarm at
best as investors fret about the possibility that other countries will get
dragged into the bond market mire and find themselves unable to borrow in the
money markets. Portugal is most people's candidate to be the next potential
bailout recipient. Its borrowing rates have risen sharply in recent weeks,
though a bond sale on Wednesday went better than expected, easing some
immediate pressure on the country's markets.
The real fear in the markets is that larger countries like Spain could become
destabilized.
Most analysts think European authorities can handle bailing out the relative
minnows of Greece, Ireland and Portugal, but Spain at around 12 percent of
the euro-zone economy would be different matter altogether.
It's this worry primarily that has hit the euro hard over recent days.
On Tuesday, it sank to $1.2968, its lowest since mid-September. At last month's
meeting, the euro was trading at a ten-month high of $1.4281 and all the talk
in the markets was that the U.S. and China were weakening their currencies
anyone remember talk of a currency war? squeezing up the value of the euro,
to the potential detriment of Europe's exporters.
The hope, at least among those who think that the markets are currently
massively overreacting by selling off government bonds, is that the ECB can
instill some confidence, or at least some sense of balance. The ECB effort to
buy bonds would support prices, and drive down yields the borrowing costs
that governments would face next time they tap the bond market to roll over
their debt loads. Excessive yields can effectively cut off a country from
borrowing, leaving it staring default in the face unless it gets a bailout.
"The hope would be that the ECB will fill the role of air-traffic controller,
talking the market down to a soft landing," said Daragh Maher, an analyst at
Credit Agricole.
As a result, there are expectations that the ECB will refrain from
discontinuing special liquidity measures for banks and may actually announce
additional liquidity support over a longer period.
Olli Rehn, the EU's monetary affairs commissioner, hinted Wednesday that the
ECB is poised to announce fresh measures following its meeting.
In a speech in Brussels, Rehn said the bailout of Ireland coupled with steps to
boost the EU's financial backstop could provide a sound basis for the ECB to
continue its role of stabilizing the eurozone, which came to the fore in May
alongside the earlier bailout of Greece.
Specifically, markets will be looking to see if the ECB will act even more
boldly and indicate that it will step up its purchases of government bonds
begun in May under its Securities Markets Program to at least stop bond prices
from falling and yields from rising. So far, it has splashed out around euro65
billion in direct bond purchases.
The market impact was already being felt Wednesday talk of a potential
increase in the bond-purchase program has helped ease the pressure on
Portuguese, Spanish and Italian bonds and helped the euro clamber up above
$1.30.
Though the ECB may announce its broad intention, few analysts think it will be
as explicit as the Federal Reserve, which last month announced its second major
foray into the bond markets. It revealed that it was spending o$600 billion
over eight months in an attempt to get market yields down.
"The ECB has always refrained from making disclosure about details of the
Securities Markets Programme, and we think that greater signs of generalized
panic in the market would be required for them to make a U-turn on their
purchase strategy," said Marco Valli, chief eurozone economist at UniCredit
Bank.
A "shock and awe" announcement on purchases with a specific numerical target is
also unlikely for other reasons, said Valli.
Valli said it would be difficult to reach a consensus on the governing council
for that kind of big move, especially as German governing council member Axel
Weber recently called for the bond buying program to be stopped.
Whatever decisions emerge, they will be announced in the context of a generally
growing economy. The ECB staff projections are expected to show higher growth
and inflation expectations for 2011.
Despite the mounting sense of doom that has gripped the eurozone this year, it
has posted stronger growth than either the U.S. and Japan despite big
divergences among countries. While Germany, Europe's biggest economy, has
prospered from the rebound in global trade and falls in unemployment, the
debt-riddled economies of the periphery are barely growing at all, and in the
case of Greece, remain mired deep in recession.