The European Central Bank (ECB) has failed to convince the world’s financial markets that it can contain the sovereign debt crisis to the eurozone.
Asian and European exchanges on Monday extended the heavy losses suffered last week, despite the ECB’s decision to buy up Italian and Spanish government debt. Financial experts in the eurozone sharply criticized the ECB’s move.
“I was horrified when I read the news,” says Hans-Peter Burghof, chair of the banking and finance department at the University of Hohenheim in southern Germany. “The ECB is repeating exactly the same mistakes it made when it bought Greek and Portuguese debt.”
The intervention by the central bankers from Frankfurt did seem to bring some breathing space, though. Yields on Italian and Spanish bonds fell sharply on Monday morning, from more than 6 percent to about 5.2 percent. Yields relate to the interest rates governments have to pay creditors who hold their bonds and serve as an indication of the risk associated with lending to these governments.
Until a few weeks ago, the debt crisis involved mainly peripheral economies such as Greece, Portugal, and Ireland. But in recent days doubts have been raised about the ability of Italy and Spain, the No. 3 and No. 4 economies in the eurozone, to pay outstanding debts. As a result, yields of bonds for these two countries rose sharply.
‘That’s not what the ECB was created for’
Political leaders in Europe are concerned that the debt crisis could threaten the stability of the common currency. German Chancellor Angela Merkel and French President Nicolas Sarkozy were among the politicians who urged the ECB on Sunday to take action.
“This is not what the ECB was created for,” argues Ferdinand Fichtner, chief economist at the Berlin-based German Institute for Economic Research (DIW). “Unlike the Fed in America, the European Central Bank’s primary task is to guard price stability. If due to political pressure it becomes one of the main creditors of a potentially insolvent economy, it forfeits its independence, it loses credibility and it gambles with taxpayers’ money.”
It’s a view shared by investors: The stock markets, which already have to digest the downgrading of the US economy by Standard & Poor’s rating agency, were not calmed by the ECB’s move. Britain’s FTSE 100 index closed 3.4 percent down on Monday, the German DAX was down 5 percent, and the French CAC lost 4.7 percent.
Tobias Blattner, a former economist at the ECB, was not surprised. “It is a reflection of the weak growth in Europe and North America. The ECB’s interventions will not change anything,” he says. “The ECB has to realize that it can’t act against the markets,” says Mr. Burghof. “Markets don’t behave irrationally, they aren’t right or wrong – they just reflect the collective knowledge of the investors. So if the ECB buys these government bonds, it simply relieves the markets of risky investments. That did not work in the Greek case, it only helped shifting the burden from private investors to the public.”