LONDON - The European Central Bank stepped up its efforts to contain the debt crisis that has engulfed the eurozone, as ECB head Jean-Claude Trichet announced the bank will prolong special measures that provide ready cash to banks.
Markets were initially disappointed Thursday when Trichet did not additionally announce an increase in the pace at which the central bank buys government bonds, and the euro sagged almost a cent during his news conference.
But it later regained some of its lost ground on market chatter that the bank might in fact be buying bonds of financially troubled eurozone countries despite Trichet's reticence on the issue.
Trichet and the ECB have clearly changed course from last month's meeting, when he indicated Europe was doing well enough for the bank to start withdrawing special measures to help banks.
Last weekend's crisis bailout of Ireland changed all that however. Now markets are worrying Portugal and even much larger Spain might join Greece and Ireland in needing a bailout.
By mid-afternoon London time, the euro was trading only 0.1 per cent lower on the day at US$1.3124, having earlier dropped to a low of $1.3066. The euro had been trading around the $1.3170 mark when Trichet took the stage in his monthly press conference in Frankfurt after the bank kept its main interest rate unchanged at the record low of 1 per cent.
Though Trichet said the bond buying program was "ongoing" and that he had never said what the limit of the program was, many in the markets had been predicting that the ECB would indicate that it was stepping up the pace.
Europe's single currency has been buoyed in the last couple of days on that speculation.
The hope was that more bond buying would contain the debt crisis that has seen Greece and Ireland needing bailouts by keeping government bond prices up and interest yields down.
Spiking yields can threaten to make it impossible for heavily indebted countries to borrow on bond markets and pay off debt as it comes due. That leaves them the unpalatable choice of defaulting or seeking an international bailout loan.
So far, the ECB is thought to have made around euro65 billion in direct bond purchases. The policy has proved controversial and Germany's representative on the governing council Axel Weber had recently called for the program to be axed.
Unlike the Federal Reserve, the ECB's program is not considered to expand the supply of money in the economy because the central bank "sterilizes" its bond purchases -- as well as putting money back into the financial system through its bond buys, the ECB takes money out elsewhere.
The ECB's decision to prolong its one-month and three-month lending operations at a fixed rate and at full allotment through to the first quarter of 2011 had been expected as Europe's debt crisis flared up again barely a month ago.
Trichet indicated that those measures could be extended further if needed.
"The governing council will continue to monitor all developments over the period ahead very closely," Trichet said.
