Rescue of euro tops priority

12:43, May 11, 2010      

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Eurozone central banks have begun buying government bonds to help support fractured markets, marking a reversal of ECB resistance to full-scale asset purchases to contain Greece's debt crisis.

The central banks of Germany and Finland confirmed Monday that central banks had wasted no time playing their part in a US$1 trillion emergency rescue package to stabilize the euro and prevent a sovereign debt crisis spreading across Europe.

"All euro system central banks will be involved in carrying out the purchases," a Bank of Finland spokesman said.

An Italian banking source said the focus was on purchasing bonds of countries in greatest difficulty.

The European Central Bank said in a statement early Monday that the step, dubbed the 'nuclear option' by many economists, was justified because of government promises to meet strict budget targets and step up consolidation efforts.

Only last Thursday, after the central bank's monthly meeting, ECB President Jean-Claude Trichet said policymakers had not discussed buying government bonds.

Boosting its firepower further, the ECB said it would also re-start dollar lending operations and reinstate some of the emergency liquidity steps it had started to phase out.

"The European Central Bank decided on several measures to address the severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy," it said in a statement after European Union finance ministers announced a euro crisis package that with International Monetary Fund support could reach 750 billion euros (US$972.6 billion).

Under the three-year plan, the European Commission - the EU's governing body - will make 60 billion euros available while countries from the 16-nation eurozone would promise backing for 440 billion euros. The IMF would contribute an additional sum of at least half of the EU's total contribution, or 250 billion euros.

The scope of the bond purchases is yet to be determined, but the ECB said they would be offset by liquidity-absorbing operations so that the stance of monetary policy is unaffected.

Under the plan, agreed late on Sunday, the ECB will buy and sell both government and private bonds on the secondary market.

The euro rallied above US$1.30 and European shares shot up 6 percent, while the premium investors demand to hold Greek government bonds plummeted by nearly 600 basis points after the rescue package was announced.

"This truly is overwhelming force, and should be more than sufficient to stabilize markets in the near term, prevent panic and contain the risk of contagion," Marco Annunziata from UniCredit Group in London said of the overall deal. He said the ECB's decision to intervene in the secondary market should offset concerns about the time it will take to deploy the stabilization funds.



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