Viva! Markets calmer as ECB buys up government debt

The European Central Bank has given in and started to buy up Spanish and Italian bonds. Although it might not work for long...

by Emma Haslett
Last Updated: 06 Nov 2012
Well, it’s been quite a riotous few days, hasn’t it (in more ways than one). After the FTSE 100 ended last week 10% lower than it had started it off the back of the euro crisis, credit ratings agency Standard & Poor’s threw a bit more drama into the mix by pronouncing that it was lowering the US’ credit rating from AAA to AA+, which economists called ‘unprecedented’. Obviously, that had the effect of causing utter chaos among everyone from investors to politicians (hence the reason, presumably, it decided to do it on a Saturday, when the markets couldn’t react). By this morning, the European Central Bank had started buying up Spanish and Italian bonds to help quell the panic. And we thought August was supposed to be boring…

No sooner had the ECB revealed that it would buy bonds from the Spanish and Italian governments, than it had already waded into the market. The result has been pretty much as desired: yields (which indicate how risky investors think they are – the higher the yield, the higher the risk) on 5-year Spanish bonds  have dropped 67 basis points to 4.75%, while Italian bonds have dropped to a similar level. That’s narrowed the gap between them and German bonds – Europe’s most stable. And while European markets haven’t exactly rallied (the FTSE 100 is down 1.5%, the Dax in Frankfurt is down 2.5% and France’s Cac 40 dropped 1.7%), falls weren’t quite as devastating as during last week.

All this is a result of desperate calls last week from the markets for the ECB to do something to prevent them from spiralling out of control. As the debt crisis spread to Italy and Spain on Thursday, markets became increasingly panicked as they worried that the crisis could lead to a ‘disorderly break-up’ of the euro. The ECB grudgingly accepted that it’s got to do something – but it’s on the condition that both Italy and Spain that they must take action to ‘rapidly reduce public deficits’. Although, given most politicians are currently on their summer holidays, we’re not sure the action will be quite as rapid as it hopes…

To be fair, they’re not the only economies being issued stern warnings: the Obama administration was also given something of a rebuke by Standard & Poor’s on Saturday, when it threatened the US with yet another downgrade, if it can’t get its spending under control. Obviously, that caused a certain amount of panic among the leaders of the world’s richest countries: last night, the leaders of G7 countries had an emergency conference call to discuss how they’re going to deal with the twin threats of the US downgrade and the euro crisis. Although some people don’t agree with the downgrade. ‘[S&P] made a $tn math error, and they didn’t check their work,’ raged (the brilliantly named) Austan Goolsbee, chairman of the White House’s council of economic advisers. But then, he would.

So while the ECB’s actions have calmed markets for now, unless troubled economies can get their houses in order, things aren’t likely to stay quiet for long. Phew. Who needs to smash up Foot Locker when there’s so much drama elsewhere?

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