ECB boosts capital as EU leaders spar over crisis

By Geir Moulson

Associated Press

Published: Thursday, Dec. 16 2010 12:00 a.m. MST

BRUSSELS — The European Central Bank said Thursday it would almost double the size of its capital coffers, gaining more firepower in its struggle to stabilize the euro, while European leaders gathering in Brussels disagreed over how to fight the continent's crippling debt crisis.

The ECB's gesture sends a strong political signal to the European Union's 27 leaders that they need to do more to salvage their joint currency and their unity, amid street protests and bitterness in richer countries about having to bailout poorer neighbors.

The ECB, which directs monetary policy for the 16 countries that use the euro, said the increase will take its capital base to €10.76 billion ($14.3 billion), from €5.76 billion currently.

It is the first time in its almost 12-year history that the ECB has asked national central banks for a capital injection. The move comes after the Frankfurt-based bank splashed out about €72 billion buying bonds from governments with shaky finances such as Greece, Ireland and Portugal.

The bond purchases have stabilized market turmoil, but the ECB has been under pressure from politicans to do more, as European policy makers are scrambling to figure out what to do after multibillion bailouts for Greece and Ireland failed to end the crisis. But the bank has moved reluctantly, and the request for more capital was seen as its demand to government leaders that it would not shoulder the risk alone.

A two-day EU summit was not expected to result in any new shock-and-awe decisions to contain the smoldering debt crisis — such as boosting the €750 billion bailout fund or the introduction of pan-European bonds. Instead it will focus on a small change to EU treaties to set up a new crisis mechanism agreed almost two months ago.

But the pressure on European policymakers to find a way out of the debt crisis remains high. Many economists warn that weak growth, paired with worries over the health of the banks, has made the debt loads of countries like Greece, Portugal and Ireland unsustainable. Concern that they won't pay back their creditors has rocked bond markets and pulled down the value of the euro.

In its statement, the ECB didn't specifically mention the bond-buying program. It said the increase "was deemed appropriate in view of increased volatility in foreign exchange rates, interest rates and gold prices as well as credit risk." The funds will come from eurozone national central banks.

Michael Schubert, an economist at Commerzbank in Frankfurt, said, "I think the signal from the ECB is political, and it shows that the ECB in general will be rather reluctant to buy strong amounts of bonds," Schubert said. In the U.S., the Federal Reserve has embarked on a much larger-scale program.

"With this, the ECB gives a clear signal that purchasing bonds isn't, so to say, a free lunch, but it creates a lot of risks and therefore it decided to increase the subscribed capital," Schubert said.

A bond sale by Spain — the eurozone economy many view as too big to bail out — highlighted the concerns over the stability of the eurozone.

Spain had to pay significantly higher interest rates to borrow €2.4 billion ($3.21 billion)from bond markets Thursday, a day after Moody's warned it may downgrade Madrid's credit rating in light of the billion of euros in debt the country has to refinance next year.

The Spanish central bank said the treasury sold €1.8 billion in 10-year bonds at an average interest rate of 5.4 percent, up from 4.6 percent in the last such auction Nov. 18. It was obliged to pay a rate of 6 percent to sell €618 million in 15-year bonds, up from 4.5 percent in October.

Meanwhile government austerity measures to bring down debt have drawn protests around Europe. In Athens on Thursday, public transport was halted by strikes as unions kept up their protest against economic austerity in crisis-hit Greece and unemployment hit a 10-year high.

Try out the new DeseretNews.com design!
try beta learn more
Get The Deseret News Everywhere