| Updated at: 1056 PST, Sunday, December 05, 2010|
FRANKFURT: The European Central Bank has decided to calm financial markets by buying huge amounts of public debt and extending generous liquidity conditions, and is pressing European leaders to step up to the plate in turn.
After its governing council met here Thursday, ECB president Jean-Claude Trichet said only that the bank would keep buying government bonds through a controversial programme launched in the midst of the Greek debt crisis in May.
At he was speaking however, the bank was buying huge amounts of Irish and Portuguese bonds, traders said.
On Friday, the central bank pursued purchases "that began massively two days ago," traders at the Natixis investment bank said.
The ECB's own figures will only be published on Monday, but "I would not be surprised that they reveal purchases of between 3.5 and five billion euros (4.7 and 6.7 billion dollars), mainly in Irish and Portuguese debt, along with some Greek debt," said BNP trader Patrick Jacq.
In the first week of its Securities Markets Programme, the ECB bought 16.5 billion euros in government bonds but the amounts quickly tapered off to nearly zero in early August. They have picked up again since then however and last week the central bank bought 1.3 billion euros worth of public debt, twice the level of the previous week.
The massive purchases helped ease tension on government bond markets, with the interest rate for 10-year Irish bonds falling late Friday to 7.928 percent and those issued by Portugal to 5.734 percent from record highs reached earlier in the week. "But the ECB measures by themselves are not enough. They must be a part of a larger programme, otherwise they will just be another band-aid," Carregosa bond strategist Filipe Silva told in Lisbon.
"It does not settle anything fundamentally but provides a couple of weeks of respite" for European Union leaders to finalize a crisis resolution mechanism, Deutsche Bank economist Gilles Moec added.
While it has agreed to cover market dysfunctions for the time being, the ECB also urges EU leaders repeatedly to work out an effective monitoring system for debt-laden governments. On Friday, Trichet appealed again to "the capacity of European authorities to draft and implement a truly effective system of macroeconomic and budgetary surveillance." He also later urged them to increase the EU's 440-billion-euro (590-billion-dollar) rescue fund, which many analysts have expressed doubts would be sufficient to bail out both Portugal and Spain, which have both come under intense pressure.
It is "important that their capacity be as effective as possible including when quantity is at stake," he told journalists.
At Morgan Stanley, economists said: "In the ECB's view, the next step-change towards a solution to the sovereign debt crisis has to come from governments. We agree." Moec said the ECB's intervention on bond markets last week was a clear message intended for investors tempted to speculate against the eurozone's weaker members. Trichet reiterated Thursday that markets "should never underestimate the determination" of eurozone leaders to preserve the European Monetary Union. For Moec: "That should be interpreted as a warning to those who bet on a eurozone bond market meltdown that they could be slammed at some point by decisive ECB action."