ECB rescue plan boosts euro and makes markets purr

 

The European Central Bank's plan to shore up the eurozone seemed to have done the trick, at least in the short term, with stock markets surging yesterday on the back of the bank's pledge to buy the bonds of ailing eurozone members.

Borrowing costs for Italy, Spain and Portugal also plummeted in response to the ECB's move, while the euro surged early yesterday as the full implications of ECB chief Mario Draghi's plan had markets purring with pleasure.

"Draghi has lowered the risk premium towards the euro," said George Saravelos, a strategist at Deutsche Bank. "We expect the euro to rise above $1.27 in the near term. The single currency also hit a two-month peak against the Japanese yen and one-month high against the Swiss franc.

Yields on Spanish 10-year government bonds fell to 5.8 per cent – the first time they have been below six per cent since May. Italian bond yields were down to 5.13 per cent. The stock markets in France and Germany neared six-month highs during the afternoon. But disappointing job numbers from the US took a little wind out of the sails of the global stock market as the day progressed.

The ECB bond-buying scheme – known as outright monetary transactions – will only come into being when a member state requests help and has applied to two EU bailout funds. As yet none of the ailing eurozone nations has asked the ECB to buy its bonds, but the existence of what Mr Draghi called a "fully effective backstop" has been enough to convince many that this time around, the eurozone means business in tackling the government debt crisis.

"The ECB delivered effectively everything we were looking for and more. We are surprised by the level of detail and directness of the statements on additional monetary policy measures," said Scott Thiel, deputy chief investment officer at BlackRock.

But markets have reacted positively before to attempts to ease the euro crisis, only to go into reverse once the political squabbling starts among EU leaders. And the ECB's scheme is definitely seen as more of a time-buyer than a magic bullet.

"The new strategy buys time and will enable the member states to fund themselves more effectively but, with a slowing global economy and uncompetitive exchange rate, it will not contribute to higher GDP or lower debt ratios," said Ted Scott, F&C director of global strategy. "For that to occur, a more fundamental change in strategy is needed which is something the politicians have to decide upon."

Whether or not the good mood lasts depends on national governments sticking to their plans to reduce their debt levels. "We need two legs," Mr Draghi said in presenting the new tactics. "Governments have to undertake the policy reforms. There is no intervention by the central bank, by any central bank, that is actually effective without concurrent policy action by the governments."

There are also question marks over whether the conditions set for ECB intervention are too strict for politicians in Italy and particularly Spain, both of which are struggling under the weight of austerity. In addition, as the ECB's decision last year to pump a trillion euros into the financial system showed, there is still the potential for major problems in the eurozone banking sector.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Ashdown Group: Finance Manager - Covent Garden, central London - £45k - £55k

£45000 - £55000 per annum + 30 days holiday: Ashdown Group: Finance Manager - ...

Ashdown Group: Systems Administrator - Lancashire - £30,000

£28000 - £30000 per annum: Ashdown Group: 3rd Line Support Engineer / Network ...

Recruitment Genius: Graduate Web Developer

£26000 - £33000 per annum: Recruitment Genius: A Web Developer is required to ...

Ashdown Group: PeopleSoft Developer - London - £45k

£45000 per annum: Ashdown Group: PeopleSoft Application Support & Development ...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003