ECB may be set to unleash ‘bazooka’ to contain crisis

The ECB could be on the verge of unleashing its biggest ‘bazooka’ yet in an effort to contain the eurozone debt crisis.

Reports emerged over the weekend that the ECB would set yield targets for bond purchases. In other words, if yields on peripheral eurozone debt, including Ireland but much more importantly Spain and Italy, exceed a certain level, then the ECB would step in and buy bonds from those countries to drive down yields.

An ECB spokesman declined to comment on what he described as press speculation and that any policy decision would be taken at the next ECB meeting in September. The report appeared over the weekend in the influential German magazine Der Spiegel.

The Bundesbank president Jens Weidmann yesterday quickly moved to dampen enthusiasm caused by the report by publicly criticising the ECB’s bond buying programme.

The ECB has stepped up its efforts in recent weeks to draw a line under the eurozone debt crisis. In a speech to investors in London at the end of July, the bank’s president Mario Draghi said he would do “whatever it takes to preserve the euro.”

Mr Draghi plans to relaunch the bank’s Securities Markets Programme (SMP) which is buying up bonds of stressed eurozone members.

Fixed income dealer at Danske Bank, Owen Callan, says it remains to be seen what will emerge from the ECB meeting in September but that the bank is looking at a number of options. “Der Spiegel is not a tabloid, so it probably means that yield caps was probably discussed. But the chances of unlimited bond purchases by the ECB is unlikely because of the position of the Bundesbank.”

The ECB’s mandate is price stability. It has moved a considerable way from its core remit in an effort to keep the single currency together. It plans to buy up the short-term debt of beleaguered member states. It now seems certain that countries such as Spain will have to agree to conditions to enable the region’s rescue fund, the EFSF and the ESM, to buy up its longer-term debt.

Investec’s Justin Doyle says the Bundesbank’s hardline stance on buying eurozone periphery debt reflects the growing level of euro scepticism among the German public. “The question is would the Bundesbank support efforts to save the euro if it was about to fall apart or would it like to see Germany go it alone?”