Markets Anticipate ECB to Recommence Bond Buying Programme

European investors are keenly awaiting the 2 August meeting of the European Central Bank (ECB) to see if the bank follows up on suggestions that it will take decisive action to address the eurozone debt crisis.

Speculation centres on whether the ECB is about to resurrect its securities market programme (SMP) bond-buying initiative, which it discontinued in January. This temporarily achieved some success in bringing down the implied cost of borrowing for governments as determined by the trade between banks and other institutions of government bonds on the secondary market.

ECB president Mario Draghi pledged on 26 July that the bank was “ready to do whatever it takes to preserve the euro”. His words were enough to raise expectations that the ECB is about to recommence buying Spanish and Italian bonds and also to drive Spain’s cost of borrowing over 10 years, which had earlier reached a new peak of nearly 7.6%, back down to 6.55%.

Analysts believe that if the ECB manages to deliver credible measures it could boost investor appetite for taking on risk, but if it disappoints markets it could lead to sharp falls in the euro and other trades perceived as higher-risk.

Previously, the ECB has made small-scale purchases of government bonds, in weekly amounts of €20bn euros (US$24.5bn). However, former ECB economist Christian Schulz, now a senior economist at Berenberg Bank, believes that more will be needed to satisfy the markets in the current climate. “It’s really about the signal… after Draghi’s comments on Thursday it is unlikely that the ECB will now shy away from determined intervention,” he said.

A poll of 24 euro money market traders carried out by Reuters on 30 July showed that 19 of them believed that the ECB was about to revive its bond-buying programme.

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