Debt crisis efforts fail to impress markets

EUROPEAN policymakers tried to turn a more powerful fire hose on the eurozone debt crisis yesterday but financial markets were unimpressed with their response.

The European Central Bank (ECB) resumed buying government bonds after a four-month break and announced new longer-term funding for liquidity-starved banks. But after a brief hiccup, Italian and Spanish bond yields resumed the climb towards danger levels.

The executive European Commission urged holidaying eurozone leaders to consider swiftly boosting the size of their financial rescue fund, but was promptly rebuffed by the Germans and Dutch.

ECB president Jean-Claude Trichet said the ECB’s controversial programme of buying government paper in an effort to stabilise markets, inactive since March, was ongoing.

European Commission president Jose Manuel Barroso said in a letter to EU leaders: “I... urge a rapid re-assessment of all elements related to the EFSF, and concomitantly the ESM, in order to ensure that they are equipped with the means for dealing with contagious risk.”

In a quick put-down, a finance ministry spokesman in EU paymaster Germany said it was unclear how re-opening the debate about financial backstops so soon after last month’s emergency summit could help calm markets.

The Dutch Finance Ministry also said the focus should be on implementing the summit decisions not reopening the discussion.

The European Financial Stability Facility (EFSF), which has bailed out Ireland and Portugal and will run a planned second package for Greece, has a maximum capacity of €440 billion. It will be replaced in 2013 by a €500bn permanent European Stability Mechanism (ESM).

The 17 eurozone leaders left the size unchanged when they agreed on July 21 to widen the funds’ role to buying bonds in the secondary market and providing precautionary credit lines to states under pressure on credit markets.

Market analysts and economists say the EFSF would need to be at least doubled and perhaps trebled to pre-empt attacks on larger economies such as Italy and Spain.

Madrid sold €3.3bn in short-term bonds earlier yesterday but had to pay a sharply higher borrowing cost.

Across the globe, Japanese authorities acted to weaken a strong yen, joining Switzerland in efforts to tame currencies buoyed by safe-haven demand from investors fretting about the health of the global economy and the eurozone’s debt woes.

Trichet said those moves were not part of any concerted multilateral policy approach. Italian Economy Minister Giulio Tremonti voiced frustration at the pace of the ECB response to a sell-off of Italian stocks and bonds over the last three weeks.

“I note that the Bank of Japan today launched quantitative easing and the Swiss central bank cut rates to zero. We are waiting for (ECB) decisions if possible, but desirable,” he said.

Tremonti said when he talked to Asian investors, they said: “If your central bank doesn’t buy your bonds, why should we buy them?”

The chief European economist of ratings agency Standard & Poor’s said only the ECB could act swiftly to stabilise battered eurozone sovereigns.

In addition to Italy and Spain, some investors are becoming jittery about the finances of France.

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