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Eurozone Bank Crisis: ECB’s Trichet Will Not Expand Bond Program

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Analysts were disappointed Thursday when the European Central Bank (ECB) announced it would not take any new action to ease concerns over contagion in the European Union (EU). While the ECB did keep interest rates at the record low of 1%, it declined to increase its bond purchase program. European stock markets, which had lifted on the prospect of decisive action, fell initially in response, but rallied to a strong close. Analysts had hoped that the ECB would take bold steps to protect the euro and halt contagion among the nations of the euro zone.

A piece of good news seemed to be Spain, which had been drawing closer to the crosshairs of the crisis. It was able to sell 2.5 billion euros’ worth of 3-year bonds at a Thursday tender, according to Reuters, with solid demand. While the yield for those bonds was 50% higher than it had been at the beginning of October, it did not rise as high as had been feared.

Jean-Claude Trichet, president of the ECB, had said of the ECB’s inaction at a news conference, “I say we are constantly alert. We are constantly looking at the situation of the markets. The Securities Market Program is ongoing, I repeat—ongoing … I won't comment on the observations of market participants.”

“Looking” at the situation may not be enough. Economists and analysts alike are expressing concern over the failure of the ECB to act, saying that the euro itself is in danger and that contagion may spread beyond the euro zone to the U.S. and Asia.

Carl B. Weinberg, chief economist at High Frequency Economics, spoke out strongly against the inaction of the ECB. In a statement, he said of the announcement, “People who were hoping for the ECB to announce an important increase in its bond purchase program did not get what they wanted. People who were hoping that the ECB would stop sterilizing its asset purchases and increase bank liquidity were disappointed. … In other words, the ECB will continue doing what it has been doing to stabilize the banking system and calm the markets.”

Pointing out that the markets had not been calmed by the ECB earlier in the week, even after the bailout of Ireland, Weinberg said that any risks, “perceived or imagined,” that the market sees in the current euro zone situation have not been reduced. He added that the ECB “should do its job” by putting additional reserves against any risks “arising from a possible crash of sovereign bond prices.”

Vincent Truglia, managing director of global economic research for Granite Springs Asset Management, LLC and former head of the sovereign risk unit at Moody’s, was also alarmed. His opinion is that the euro zone is not sustainable in its current form. In an interview with AdvisorOne, he explained that in order for the euro zone to work, richer nations need to subordinate their interests to poorer nations within the group.

On the other hand, he said, what the ECB has done is to preserve a situation in which nations will become “serial defaulters.” The greatest danger, he added, is further problems for the European financial system. He foresees an end to the EU and the euro itself. Germany is already talking about letting the euro fail. Demonstrations across Europe will spread, he added. “Civil societies can’t deal with this. Austerity measures will not work.”

In his blog earlier this week, Truglia said that there was no agreement among European elites about what needs to be done across Europe; he called it “pre-1914 bickering. Europeis putting the world at risk.”

His concerns, if not his example, are echoed by Weinberg, who concluded, “This inaction may be seen by some as analogous to the Fed's inaction in the face of a growing banking crisis in the late 1920s. Telling everyone that the ECB is already doing everything as perfectly as possible, and that no change to its engagement in resolving today's crises is warranted, does not help bring the markets back toward stability.”


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