As Market Tension Builds, World Leaders Ponder Response
By JACK EWING
FRANKFURT — Policy makers around the world were searching on Sunday for a way to respond to market tensions that seemed to be growing too powerful for any one economic superpower to cope with alone.
In Europe, there was speculation that the European Central Bank, whose governing council was expected to hold an emergency conference call late Sunday, would buy Spanish and Italian bonds to prevent borrowing costs for those countries from becoming unsustainable.
But as the shock of the U.S. debt downgrade Friday reverberated dangerously with anxiety about European debt, some analysts said that the E.C.B. would itself need help because of its limited charter and its internal divisions.
“They just can’t allow the Italian economy to go down the tubes. It would be a Lehman-type situation,” Uri Dadush, a senior associate at the Carnegie Endowment for International Peace, said Sunday. He was referring to the collapse of the investment bank Lehman Brothers in 2008, which touched off the global financial crisis.
Mr. Dadush put the cost of a bailout of Italy at $1.4 trillion, with Spain requiring another $700 billion. Those sums would be a challenge even for the most solvent European countries, foremost among them Germany.
“Such bailouts would not only strain the frail political support for these exercises to the breaking point,” Mr. Dadush wrote, “they would also call into question the debt-carrying capacity of the core European countries.”
Finance ministers of the Group of 7 and Group of 20 nations were conferring Sunday, Reuters reported, but it was not clear whether there was enough support for a massive coordinated intervention in the markets — or even whether that would be a good idea.
“I don’t know if there is a policy response that makes sense, except support the banks,” Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, New York, said Sunday. He said the E.C.B. should make even greater quantities of cheap loans available to banks, so they could survive a decline in the value of their holdings of Spanish and Italian debt.
After Standard & Poor’s took away the AAA rating of U.S. debt Friday, policy makers had a brief window of time to try to do something to restore confidence before Asian markets opened, and prevent an extension of the stock market rout that began last week.
In a sign of the acute tension, stock markets in the Middle East fell in Sunday trading, while the Tel Aviv exchange delayed opening for the first time since the collapse of Lehman Brothers in 2008, Reuters reported.
Market circuit breakers kicked in after opening prices were down more than 5 percent, Reuters said.
The E.C.B. on Thursday intervened in European bond markets for the first time since March. But it appeared that the bank was buying only relatively small amounts of Portuguese and Irish bonds. The E.C.B. may have intended this to be a warning shot to signal its resolve, but markets seemed to have interpreted the modest intervention as a sign of weakness.
The move also reopened divisions on the E.C.B. governing council, with Jens Weidmann, president of the German Bundesbank, and several other members opposing the bond purchases.
“This type of bond market intervention is unlikely to achieve much,” Antonio Garcia Pascual, an analyst at Barclays Capital, said in a note Friday. Even if the E.C.B. starts buying Italian and Spanish bonds, “this begs the question of how far the E.C.B. is ready to go down that route — a proposition that markets may be testing in the weeks ahead.”
Mr. Weinberg said that even the E.C.B. would be hard-pressed to buy enough bonds to hold down yields on Spanish and Italian debt in the long-term, and prevent the countries’ borrowing costs from reaching levels that would eventually prove ruinous.
European governments have agreed to use the European Financial Stability Facility, their joint bailout fund, to buy government bonds on the secondary market. But Germany will be reluctant to risk its own credit rating by committing massive funds to Spain and Italy, a move that would be politically unpopular as well.
It is doubtful whether the U.S. Federal Reserve or the central banks of other nations would be willing or able to help the E.C.B. intervene in bond markets, Mr. Weinberg said. “Will the Fed help out the E.C.B.? I don’t see how that works,” he said. “The Fed has its balance sheet pumped up already.”
Ultimately, markets will calm down only when they are convinced that Italy and Spain have their debt under control, and have also reduced bureaucratic impediments to economic growth, analysts said. On Friday, Silvio Berlusconi, the Italian prime minister, unveiled a package of measures designed to reduce the budget deficit. But investors will probably not be convinced until the measures have become law.
“The solution is for Italy and Spain to get their house in order fast, so markets don’t have to be scared about what happens next,” Mr. Weinberg said. He added, “I don’t know if that can happen by Monday.”
In Europe, there was speculation that the European Central Bank, whose governing council was expected to hold an emergency conference call late Sunday, would buy Spanish and Italian bonds to prevent borrowing costs for those countries from becoming unsustainable.
But as the shock of the U.S. debt downgrade Friday reverberated dangerously with anxiety about European debt, some analysts said that the E.C.B. would itself need help because of its limited charter and its internal divisions.
“They just can’t allow the Italian economy to go down the tubes. It would be a Lehman-type situation,” Uri Dadush, a senior associate at the Carnegie Endowment for International Peace, said Sunday. He was referring to the collapse of the investment bank Lehman Brothers in 2008, which touched off the global financial crisis.
Mr. Dadush put the cost of a bailout of Italy at $1.4 trillion, with Spain requiring another $700 billion. Those sums would be a challenge even for the most solvent European countries, foremost among them Germany.
“Such bailouts would not only strain the frail political support for these exercises to the breaking point,” Mr. Dadush wrote, “they would also call into question the debt-carrying capacity of the core European countries.”
Finance ministers of the Group of 7 and Group of 20 nations were conferring Sunday, Reuters reported, but it was not clear whether there was enough support for a massive coordinated intervention in the markets — or even whether that would be a good idea.
“I don’t know if there is a policy response that makes sense, except support the banks,” Carl B. Weinberg, chief economist of High Frequency Economics in Valhalla, New York, said Sunday. He said the E.C.B. should make even greater quantities of cheap loans available to banks, so they could survive a decline in the value of their holdings of Spanish and Italian debt.
After Standard & Poor’s took away the AAA rating of U.S. debt Friday, policy makers had a brief window of time to try to do something to restore confidence before Asian markets opened, and prevent an extension of the stock market rout that began last week.
In a sign of the acute tension, stock markets in the Middle East fell in Sunday trading, while the Tel Aviv exchange delayed opening for the first time since the collapse of Lehman Brothers in 2008, Reuters reported.
Market circuit breakers kicked in after opening prices were down more than 5 percent, Reuters said.
The E.C.B. on Thursday intervened in European bond markets for the first time since March. But it appeared that the bank was buying only relatively small amounts of Portuguese and Irish bonds. The E.C.B. may have intended this to be a warning shot to signal its resolve, but markets seemed to have interpreted the modest intervention as a sign of weakness.
The move also reopened divisions on the E.C.B. governing council, with Jens Weidmann, president of the German Bundesbank, and several other members opposing the bond purchases.
“This type of bond market intervention is unlikely to achieve much,” Antonio Garcia Pascual, an analyst at Barclays Capital, said in a note Friday. Even if the E.C.B. starts buying Italian and Spanish bonds, “this begs the question of how far the E.C.B. is ready to go down that route — a proposition that markets may be testing in the weeks ahead.”
Mr. Weinberg said that even the E.C.B. would be hard-pressed to buy enough bonds to hold down yields on Spanish and Italian debt in the long-term, and prevent the countries’ borrowing costs from reaching levels that would eventually prove ruinous.
European governments have agreed to use the European Financial Stability Facility, their joint bailout fund, to buy government bonds on the secondary market. But Germany will be reluctant to risk its own credit rating by committing massive funds to Spain and Italy, a move that would be politically unpopular as well.
It is doubtful whether the U.S. Federal Reserve or the central banks of other nations would be willing or able to help the E.C.B. intervene in bond markets, Mr. Weinberg said. “Will the Fed help out the E.C.B.? I don’t see how that works,” he said. “The Fed has its balance sheet pumped up already.”
Ultimately, markets will calm down only when they are convinced that Italy and Spain have their debt under control, and have also reduced bureaucratic impediments to economic growth, analysts said. On Friday, Silvio Berlusconi, the Italian prime minister, unveiled a package of measures designed to reduce the budget deficit. But investors will probably not be convinced until the measures have become law.
“The solution is for Italy and Spain to get their house in order fast, so markets don’t have to be scared about what happens next,” Mr. Weinberg said. He added, “I don’t know if that can happen by Monday.”
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