ECB slows down government bond-buying program

By David Mchugh

Associated Press

Published: Monday, Oct. 17 2011 8:30 a.m. MDT

European Central Bank President, Jean-Claude Trichet speaks to the media during a press conference at French finance ministry in Paris, Saturday, Oct. 15, 2011. Finance ministers and central bank governors of the world's leading economies are gathering in Paris to discuss how to save Greece from bankruptcy, beat a path out of Europe's wider debt crisis and restart global economic growth.

Michel Euler, Associated Press

Enlarge photo»

FRANKFURT, Germany — The European Central Bank said Monday it bought only €2.2 billion ($3.0 billion) in government bonds last week, as it further slowed down its program which tries to keep Europe's debt crisis from mushrooming.

The purchases were just under the €2.3 billion the week before. The ECB reluctantly re-started the purchase program two months ago as the financial crisis threatened to drive Italian and Spanish borrowing rates to unsustainable levels.

The ECB's purchases have helped keep interest yields down on those countries' government bonds in the secondary market, lowering the rate costs they face as they borrow from markets.

Rising rates, driven by fears of default, left Greece, Ireland and Portugal unable to borrow affordably and forced them to take bailouts.

The ECB has said it hopes to hand off the risky purchases to the eurozone's new bailout fund, but when that might happen has not been determined. The bailout fund, the European Financial Stability Facility, has been given new powers to help recapitalize banks and purchase bonds in the secondary market.

ECB head Jean-Claude Trichet said Saturday that a strengthened EFSF should contribute to more stable financial markets and eventually make the ECB purchase program unnecessary.

In addition to easing borrowing rates for governments, eurozone officials are trying to keep the debt markte turmoil from spreading to banks that hold government bonds and could suffer losses in cause of defaults.

ECB purchases have lately been well below the €22.0 billion in the week ending Aug. 12 and €14.3 billion for the week ending Aug. 19.

The Italian 10-year bond yield has rising, however, from just under 5 percent when the purchases started to 5.79 percent. The ECB had driven them down from over 6 percent in early August.

Though the bond purchases have been important in keeping the debt crisis from engulfing larger eurozone economies, they expose the central bank to losses on the bonds and fueled perception it is propping up financially shaky governments, even if indirectly.

The ECB moves have bought time as European leaders work on a wider-ranging solution that could include debt reduction for Greece at the expense of bondholders, more capital to buffer banks that would take losses from that, and a stepped-up role for the EFSF.

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