ECB to become lender of last resort

Despite staunch opposition from the ECB itself and Germany, the euro zone’s paymaster, 16 out of 25 analysts in Reuters’ wider monthly government bonds poll said they expected the bank would eventually move to act as a backstop for governments and the euro zone financial system.

Several of the world’s leading economists last week named it as one way of solving a debt crisis that is choking funding for Italy and Spain, the third and fourth largest euro zone economies that Europe can ill afford to bail out.

Pressure in favour of such a move is mounting. Last week, French finance minister Francois Baroin said he was in favour of changing the ECB’s role, pointing to how U.S., British and Swiss central banks have been effective lenders of last resort.

A separate Reuters poll of ECB watchers on Tuesday, however, showed only a 40 percent chance the ECB would actually start printing money by buying government bonds from euro zone banks.

Both ideas would add up to the sort of dramatic action markets have been demanding for some time from the ECB and would be seen as the bank crossing a threshold where it opts to weigh in behind the financial system.

“In the absence of sufficiently large sources of funding from outside the EU, more substantial ECB support will be needed to avoid disorderly default of globally systemically significant euro area sovereigns like Italy and Spain,” said Willem Buiter, chief economist at Citi, in a research note.

“We expect such ECB support to be forthcoming.”

On Wednesday, EU Economic and Monetary Affairs Commissioner Olli Rehn said the euro zone was entering a 10 day period to complete and conclude the response to the debt crisis, as Italian bond yields soared to levels widely regarded as unsustainable.

Nine economists, however, said the ECB would avoid becoming lender of last resort.

“For this to happen, the ECB statutes and remit need to be changed. That will take years,” said Michala Marcussen, global head of economics at Societe Generale.

“But the ECB is playing an important role in helping governments to fund themselves as it is.”

QE

The ECB has bought more than 200 billion euros of government bonds since May 2010, but it has offset those each time by reclaiming the cash from banks to prevent the programme from stoking inflation. On Tuesday it failed for the first time since this May to fully offset its 203.5 billion euros in buying, adding to fears about the scale of financial market stress caused by the debt crisis.

A poll of economists on Tuesday showed there was a 40 percent chance that the ECB would start buying these bonds without sterilising the purchases, effectively joining the U.S. Federal Reserve and Bank of England in quantitative easing.

Most economists — 15 out of 24 — said the European Financial Stability Facility (EFSF), the region’s bailout fund, should not be converted into a bank, a move that in theory would give it access to unlimited funding from the ECB.

“The EFSF should become alike to a fiscal policy instrument for the EU,” said Adolfo Laurenti, deputy chief economist at Merisow Financial.

Euro zone ministers agreed to ramp up the EFSF’s firepower on Wednesday, but they couldn’t say by how much, as Spanish and Italian borrowing costs leapt closer to catastrophic levels.

Even with a fully-functioning and boosted EFSF, 21 out of 25 respondents said the ECB would continue buying bonds from the euro zone’s periphery, with one saying the EFSF would probably be too small for the central bank to cease its purchases.

The wider poll of 40 analysts again showed major government bond yields at very depressed levels in the United States, Germany, Japan and Britain, with little scope for rising yields amid so much economic weakness. The results were little changed from October.