Belfast Telegraph

Thursday 24 April 2014

ECB steps up state bond purchases

The European Central Bank bought 385 million pounds worth of governments bonds last week

The European Central Bank bought 462 million euro (£385 million) in government bonds last week, an increase from the minimal purchases of the week before.

The bond buys help keep down the elevated borrowing costs that are putting pressure on heavily indebted governments such as Italy and Spain, and have helped the eurozone avoid a financial meltdown.

The newly announced purchases compare with a 19 million euro (£16 million) the week before, and to 3.4 billion euro (£2.8 billion) the week before that.

European Central Bank president Mario Draghi has resisted pressure to step up the purchases, saying governments must not rely on a central bank bailout but make politically difficult choices to cut deficits and improve growth.

Interest rate yields on Italy's 10-year bonds remain elevated at 6.91%.

Yields above the 7% level pushed Greece, Ireland and Portugal to seek bailouts from other eurozone countries and the International Monetary Fund because they could no longer borrow affordably.

Countries must borrow by selling bonds to pay off older bonds as they mature; if market fears of default push borrowing costs too high, governments can find themselves cut off from credit.

In that case they must seek a bailout or default.

While the three small countries could be rescued, economists say Italy, the eurozone's third largest economy with some 1.9 trillion euro (£1.5 trillion) in outstanding debt, would strain the limited resources available for rescue. A default, on the other hand, could trigger a full-blown banking and economic crisis.

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