ECB's Intervention Fails to Calm Eurozone Debt Crisis

Strategic Insights -

The European Central Bank's (ECB) recent decision to buy up Italian and Spanish government debt has failed to convince financial markets that the sovereign debt crisis is contained within the eurozone. Despite the intervention, Asian and European exchanges continued to suffer heavy losses, with the British FTSE 100 index closing 3.4 percent down, the German DAX down 5 percent, and the French CAC down 4.7 percent. Financial experts in the eurozone sharply criticized the ECB's move, citing concerns about the bank's independence and credibility. The intervention has raised doubts about the ability of Italy and Spain to pay outstanding debts, with yields on their bonds falling sharply from over 6 percent to about 5.2 percent. This development has added to the growing concerns among political leaders in Europe, with German Chancellor Angela Merkel and French President Nicolas Sarkozy urging the ECB to take action.

Key Takeaways:

  • The ECB's decision to buy up Italian and Spanish government debt has failed to calm financial markets, with continued losses in Asian and European exchanges.
  • Yields on Italian and Spanish bonds fell sharply from over 6 percent to about 5.2 percent, but still remain high, indicating that investors believe these countries have a high risk of default.
  • The intervention has raised doubts about the ability of Italy and Spain to pay outstanding debts, with yields on their bonds falling sharply.
  • The ECB's primary task is to guard price stability, and its actions are seen as a departure from this goal by some financial experts.
  • Investors view the ECB's intervention as a reflection of the weak growth in Europe and North America, and not as a solution to the debt crisis.
  • The burden of the debt crisis is being shifted from private investors to public taxpayers, according to some financial experts.
  • Hans-Peter Burghof, chair of the banking and finance department at the University of Hohenheim, Germany, stated that "The ECB is repeating exactly the same mistakes it made when it bought Greek and Portuguese debt."
  • Ferdinand Fichtner, chief economist at the German Institute for Economic Research (DIW), argued that "This is not what the ECB was created for." and that the bank's independence and credibility are at risk.
  • Tobias Blattner, a former economist at the ECB, stated that "It is a reflection of the weak growth in Europe and North America. The ECB's interventions will not change anything."

Statistics:

  • The British FTSE 100 index closed 3.4 percent down on Monday.
  • The German DAX was down 5 percent.
  • The French CAC lost 4.7 percent.
  • Yields on Italian and Spanish bonds fell sharply from over 6 percent to about 5.2 percent.
  • The yields on Italian and Spanish bonds indicate a high risk of default, with investors requiring a higher return to compensate for the risk.

Sources:

  • The European Central Bank (ECB)
  • Hans-Peter Burghof, chair of the banking and finance department at the University of Hohenheim, Germany
  • Ferdinand Fichtner, chief economist at the German Institute for Economic Research (DIW)
  • Tobias Blattner, a former economist at the ECB
  • British FTSE 100 index
  • German DAX
  • French CAC
  • Standard & Poor's rating agency