“The European Central Bank will restart its controversial government bond purchases rather than offer banks another round of unlimited three-year loans as the sovereign debt crisis worsens, a survey of economists shows.
Of 22 economists polled this week, 17 predicted the ECB will be forced to resume theSecurities Markets Program (ECBCSMP), while only one forecast it will offer another batch of three-year cash. Nine said the central bank may consider shorter maturity loans of one or two years.
“Market stresses will eventually force the ECB to restart the bond program, but it’s not imminent,” said Ken Wattret, chief euro-area economist at BNP Paribas in London, who participated in the survey conducted April 11-12. “Trying to get consensus on the council for it will be difficult.”
The bond purchases have split the ECB’s Governing Council, with German policy makers in particular arguing they blur the line between monetary and fiscal policy. The program was mothballed a month ago after the ECB’s 1 trillion euros ($1.3 trillion) of three-year loans reversed a sell-off in Italian and Spanish bonds that threatened to splinter the 17-nation euro region.
With tensions returning and driving up borrowing costs again in Spain and Italy, some economists say the so-called Longer Term Refinancing Operations aren’t the game-changer they were hailed to be.
‘Toxic’ Loans
“There is mounting evidence that the LTRO is pretty toxic for banks and isn’t working,” said James Nixon, chief European economist at Societe Generale in London and a former ECB official. “I don’t think there will be another one.”
Spain’s 10-year yield jumped to 5.99 percent earlier this week, nearing levels that prompted Greece, Ireland and Portugal to seek bailouts. Italian three-year borrowing costs rose more than 1 percentage point at an auction yesterday.
Debt markets rallied after the ECB’s three-year tenders in December and February as banks used some of the cheap cash to buy government bonds. Investment in government debt by Spanish banks climbed to a record 246 billion euros in February, an increase of 20 percent from December, ECB figures show.
The effect on bond markets is waning now and banks are left with assets that investors are increasingly wary of, saidJacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc (RBS) in London…”
