Europe's central bank ready to inject cash

European Central Bank head Jean-Claude Trichet hinted Thursday that the bank might again buy bonds of Europe's most financially troubled governments in an attempt to calm markets fretting over the debts of both Italy and Spain.

Markets fear Italy and Spain next in debt crisis

European Central Bank President Jean-Claude Trichet said Thursday it might again buy bonds of Europe's most financially troubled governments in an attempt to calm markets. (Mario Vedder/Associated Press/dapd)

European Central Bank head Jean-Claude Trichet hinted Thursday that the bank might again buy bonds of Europe's most financially troubled governments in an attempt to calm markets fretting over the debts of both Italy and Spain.

The bank also offered more emergency credit to banks, and indicated there was a greater chance that an interest rate hike once expected in October would be put off — a stance that could ease some pressure on troubled economies in the 17-member euro zone.

European officials are trying to keep the government debt crisis — that has brought down bailed-out Greece, Ireland and Portugal — from hitting Spain and Italy, which are regarded as too big to rescue with the funding now available to the euro zone's bailout mechanism.

Questions about the bond-buying program, left unused for four months, dominated Trichet's news conference following Thursday's widely anticipated decision to leave the ECB's main interest rate unchanged at 1.5 per cent.

Trichet left open the possibility of reopening the bond-purchase program but appeared determined to keep market traders off-balance about the bank's actual intentions.

"I never said it was dormant," he said, adding that the bank would reveal any purchases at the regular Monday disclosure.

"You will see what we do," he said. "If we intervene, we intervene, and we will publish the amount of what we have done."

Italian, Spanish rates soar

Italian bonds, as well as those of Spain, have seen their prices fall of late and that's been driving up the interest yields that governments face to finance their debt.

Such rising yields drove Greece, Portugal and Ireland to seek bailout loans from the euro zone and the International Monetary Fund.

Euro zone leaders agreed a second bailout for Greece July 21 and gave their bailout fund the power to buy bonds in the secondary market. But the changes will not get through national parliaments until this fall, and the ominous increase in market tensions over the past few days has led some observers to wonder whether the ECB would reactivate bond purchases.

Analyst Carsten Brzeski at ING in Brussels said it appeared the ECB had made some purchases as Trichet was speaking "in an attempt to show the program was still alive."

But he said the program, whose official rationale is not supporting troubled governments but making sure the bank's interest rate policy is transmitted to markets, likely remained too "halfhearted" to make a decisive impact.

Marc Ostwald of Monument Securities said that pre-announced bond purchases would rob them of their effect.

"Intervention is not ruled out but the ECB sensibly wants to preserve an element of surprise," Ostwald said.

Whatever the case, Italian bond yields eased to 5.96 per cent from as high as 6.28 per cent earlier in the day. They were back above 6 per cent again however within an hour after the press conference ending.

Brzeski also said Trichet appeared to be open to postponing a quarter-point rate hike that some analysts expected in October. "A next rate hike does not seem to be on the cards any time soon."

ECB still watching inflation

Trichet said the bank would monitor inflation "very closely," repeating the bank's stance from last month. That phrasing is considered code for a possible rate hike in the months ahead, but not one next month.

But he also added phrases indicating uncertainty about growth, which would argue against a rate hike that would put more interest costs on banks, businesses and consumers.

"Uncertainty is particularly high," he said.

The bank raised rates a quarter point in April and July to ward off inflation, but the prospects for the economy and the debt crisis have worsened since then.

The bank also announced the extension of its previous short-term credit offerings to banks, and added a six-month offering of unlimited credit in an operation that would settle on August 11.

Those measures aimed at supporting banks by making added ready money available if they want it.

Jitters about possible defaults on government bonds have left some of Europe's weaker banks dependent on the central bank's credit window to fund their businesses day to day.