ECB move risks major political consequences

THERE is a large risk of political fallout in Europe, say experts who expressed concern following the European Central Bank’s (ECB) decision to buy Italian and Spanish bonds.

The significant bond buying move is a step closer towards a fiscal union and was called the only practical result of a frantic weekend. The move forced down Italian and Spanish borrowing costs in an initial reaction.

Royal Bank of Scotland estimates that bond buying may eventually hit €850 billion.

“This huge-risk pooling exercise will not come easily and the risk of political fallout will be large,” Jacques Cailloux, chief European economist at RBS said. “This might be the necessary and painful step required to pave the way for the creation of a common debt instrument, the quid pro quo for this might be the loss of fiscal sovereignty.”

It was estimated the ECB bought about €2 billion in Italian and Spanish debt after it agreed on Sunday to broaden its bond-buying programme for the first time to include the eurozone’s third and fourth-biggest economies.

Finance Minister Michael Noonan said the intervention by the ECB seems to have worked.

“Last week the risk was that, as bond rates in Italy went toward 7%, they’d be driven into some kind of bailout programme. They have fallen by almost 1% this morning so they are well out of the bailout territory now,” he said.

Head of commodities research at Commerzbank Eugen Weinberg said chances of a double-dip recession have increased over the last week.

“I still don’t think another recession is a probability, but economic growth forecasts are being lowered,” he said.

Germany has long opposed a US-style federal fiscal union and yesterday Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democrats, said we “don’t need” a fiscal union and we should oppose it because that would mark a “dissolution of responsibilities”.

Yesterday, the yield on Italy’s 10-year bond fell 82 basis points to 5.277% and the Spanish yield slid 89 basis points to 5.16%, the biggest one-day drops since the start of the euro.

ECB president Jean Claude Trichet said in June he favoured a European Finance Ministry and giving the EU veto powers of national budgets. He said yesterday the ECB would “actively implement” its bond-buying programme.