ECB Will Buy Bonds, Not Make Loans: Economists

Germans protesting further longer-term refinancing

The European Central Bank is more likely to resume buying up sovereign bonds than it is to make any more cheap long-term loans, according to a poll of economists.

Bloomberg reported Friday that it surveyed 22 economists and of that number, 17 said the ECB would restart its Securities Markets Program (ECBCSMP) if the European debt crisis escalates. Only one believed it likely to offer more long-term loans, while nine said it was possible that the ECB would extend shorter-term loans of a year or two.

“Market stresses will eventually force the ECB to restart the bond program, but it’s not imminent,” Ken Wattret, chief euro-area economist at BNP Paribas in London, was quoted saying. “Trying to get consensus on the council for it will be difficult.”

The governing council of the ECB has split over the issue, with German members protesting a resumption of the Longer Term Refinancing Operations (LTRO) and saying that they are straddling both monetary and fiscal policy. Although LTRO warded off disaster over Spanish and Italian bonds that could have destroyed the euro zone, in the long run they are seen as ineffective in combating the larger crisis as yields on those bonds have begun to rise once more.

“There is mounting evidence that the LTRO is pretty toxic for banks and isn’t working,” James Nixon, chief European economist at Societe Generale in London and a former ECB official, said in the report. “I don’t think there will be another one.”

The yield on Spanish 10-year bonds is now near the levels at which Greece, Ireland and Portugal sought bailouts, while Italian yields on 3-year bonds rose more than a percentage point in a Thursday sale. Investors are backing off sovereign bonds from troubled euro zone countries, a situation the LTRO was intended to prevent.

“Something is wrong when you load up on assets that were considered risky in November and deemed un-risky in January,” Jacques Cailloux, chief European economist at Royal Bank of Scotland Group (RBS) in London, was quoted saying. “Now we’re seeing the worst you could have hoped for. As soon as the situation of the sovereign worsens, banks will come under additional market pressure. That’s extremely negative.”

Reprints Discuss this story
This is where the comments go.