Is Europe Finally Turning Itself Around?
The European Central Bank announced recently that it declined its sovereign debt purchases this past week. It purchased $3.1 billion of Italian and Spanish bonds in the week ending October 7, compared to $5.23 billion the week before.
The latest move by the ECB marks a continuation in its attempt to provide European banks liquidity in times when the equity and debt capital markets are nearly frozen. Jean-Claude Trichet also announced on October 6 that the ECB will offer banks 12 and 13 month term loans with unlimited credit. Regardless of the ECB's efforts, investors are still nervous about Europe's financial health.
Since the United States' failed attempts to spur economic recovery via QE1 and QE2, capital markets have slowed down dramatically. Debt capital markets are currently troubled, primarily because investors do not want to pay high prices for the instruments. The high prices are present because of lowered demand as well as higher market risk. Investment banks are also unwilling to freely underwrite debt instruments, fearing risks of unnecessary exposure in the event investors are not interested in the investments.
The ECB is following the footsteps of the United States, and only time will tell if its attempts in boosting liquidity are successful. Until then, the short term decrease in debt purchases may mean that banks are requiring less and less of the ECB's help to remain solvent.
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