ECB must buy 'hundred of billions' of bonds to tame Europe's debt crisis
Fitch Ratings has warned that it may take massive asset purchases by the European Central Bank to prevent Europe's sovereign debt crisis escalating out of control.
By Ambrose Evans-Pritchard
Published: 8:19PM BST 17 Jun 2010
Brian Coulton, the agency's head of sovereign ratings, said German members of the ECB appeared to be blocking the sort of muscular intervention in southern European bond markets needed to restore the shattered confidence of investors.
"There has been an unwillingness to follow through, and markets are going to want to see the ECB's money. It will require hundreds of billions in my opinion," he told a global banking conference.
The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU's `shock and awe' package, known as the European Financial Stability Facility. Total purchases so far have been €47bn (£39bn).
It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer.
ECB council member Jose Manuel Gonzalez-Paramo said it was "not entirely correct" to assume that the ECB was the sole buyer of the debt. "We will continue buying bonds until the situation has stabilized," he said.
The Bundesbank is reportedly irked that French banks have led the rush to the exits while German banks have stuck by a gentleman's agreement to keep their Greek assets. The ECB's council insists that it has "sterilized" all purchases, offering no net stimulus. In effect, the ECB has done little to offset severe fiscal tightening by some eurozone states, and as the M3 money supply contracts.
"The ECB commitment seems half-hearted," said Andrew Balls, head of PIMCO's team in Europe. "The European sovereign problem has started to contaminate the European banking sector and the global economy."
Experts attending a seminar by the Central Banking Journal said the ECB had been behind the curve for months. "They were always one day and one euro too late," said Paul Mortimer-Lee, market chief at BNP Paribas.
A smooth auction of €3.5bn of Spanish bonds offered some respite yesterday after a week of stress on the EMU periphery, but Spain had to pay punitive rates. The average yield on 10-year bonds was 4.86pc, a near record spread of 220 basis points over German Bunds.
Silvio Peruzzo from RBS said the auction does little to help Spanish banks and firms that have been frozen out the debt markets and face a funding crunch.
"The ECB needs to act before contagion becomes endemic. Spain's banking system in at the heart of an ice-storm and there is a risk of 'sudden stop' if they can't roll over debt. We expect intervention, probably in covered bonds," he said.
Spain's premier Jose Luis Zapatero said the banks remain well capitalized, and has led the way in pushing for release of stress tests on each lender. "There is nothing better than transparency to show solvency, and leave behind baseless rumours," he said.
Santander has emerged from the probe as the strongest of the EU's large banks, according to leaks in the Spanish press. Madrid said weaker lenders would need just a third of the country's €99bn bank-rescue fund.
Marco Annunziata from UniCredit said the release of the stress tests is a gamble. "Spain has raised the stakes, and market expectations: now it will need to show it is up to the challenge. Spain is the eurozone's lynchpin. If it fails, the eurozone's wheels will come off," he said.
European president Herman van Rompuy said the EU-wide results would be published in July, helping to clear the air and restore trust to the inter-bank lending market. The Bundesbank insists that "back-stop" facilities should be in place, a tacit admission that some lenders are in dire shape.
Fitch said European banks must refinance nearly €2 trillion of long-term debt by the end of 2012 in an unfriendly market. "There's an awful lot of debt coming due in 2011 and 2012, and that is becoming a concern," said Bridget Gandy, the agency's banking expert.
Smaller banks have put off refinancing in the hope that spreads would fall and are now caught in a vice. Mrs Gandy said the situation could turn serious if global growth falters, tipping Europe into a double-dip recession.
David Owen from Jefferies Fixed Income said the eurozone may start contracting again in the second half of the year. He said the "core problem" haunting the European debt markets is that investors have little faith in the EU strategy of forcing states to carry out draconian cuts in the middle of a recession.
Mr Owen said these countries need sustained growth to claw their way out of debt-deflation traps, and that will require fully-fledged quantitative easing by the ECB, and drastic currency depreciation. "If the euro falls to parity or down to 80 cents against the dollar, we would start to see a solution," he said.
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