This afternoon the President of the European Central Bank Jean-Claude Trichet has told journalists that he intends to offer unlimited loans to members of the EMU until the end of Q1 2011.
The decision – made at today’s ECB press conference to announce the bank’s latest interest rates – will reassure investors that the bank will not abandon indebted euro zone members such as Portugal and Spain. Indeed following the decision the euro made steep gains against the dollar – moving to a session high of 1.3217.
Furthermore Mr. Trichet confirmed that the ECB has been aggressively buying Portuguese and Spanish government bonds in an attempt to tighten bond yield spreads. These measures are intended once more to reassure markets that the EMU periphery members remain viable investments – and in fact following the announcement Portguese bond yields tightened 0.5%.
The decision to rapidly purchase government bonds has been controversial inside the ECB. Officials have commented that the policy involves blurring the line between currency and fiscal union, increasing the chances of an EMU political entity. The ECB was never intended for this function; yet circumstances have forced the bank to take action.
In the short term though Mr. Trichet’s press conference has had a positive effect on the euro, and given indebted EMU members some much needed breathing space.