By Jack Duffy

NEW YORK (MNI) – The European Central Bank, which purchased
billions in Italian and Spanish bonds Monday, is likely to remain a
highly visible market presence until the Eurozone’s strengthened bailout
fund becomes operational in several months.

“I don’t think this is a one-off,” said Marco Valli chief Eurozone
economist at UniCredit Research in Milan. Valli, who estimated the ECB’s
intervention on Monday at between E7 billion and E8 billion, added: “We
are in for a relatively prolonged period of this.”

Analysts said the ECB had little choice but to expand its
Securities Market Program to Italy and Spain because the new powers
given to the European Financial Stability Facility to lend to shaky
governments and intervene in secondary markets won’t be approved by EU
parliaments until late September or October.

“The ECB has been left holding the baby,” said Marc Ostwald, a
strategist at Monument Securities in London. “They never really liked
having these responsibilities. But they have no choice.”

Yields for Italian and Spanish 10-bonds both rose above the 6%
level last week, reaching 14-year highs. Italian rates also topped those
of Spain as investors fretted about Italy’s ability to pay its huge debt
as the global economy slowed.

Following Monday’s ECB intervention, Spanish 10-year yields plunged
by 88 basis points to close at around 5.15%, while Italian yields
dropped by 80 basis points to 5.28%.

Barclays Capital said in a research note the ECB will probably
continue to buy around E6 billion a week in the two markets, purchasing
a total of E50 billion to E75 billion in the next few months.

The intervention “will likely provide some breathing space for the
various changes to the EFSF and the fundamental reforms to be
implemented,” Barclays said.

Analysts said the ECB intervention may bring some temporary
stability to the Italian and Spanish debt markets, but over time the
central bank’s purchases will be dwarfed by the size of the two markets
and the two countries’ funding needs.

Spain’s bond market, at around E650 billion, is larger than the
combined markets of Greece, Ireland and Portugal. The Italian debt
market totals E1.6 trillion, the world’s third large after the US and
Japan. The amount of debt in the 2-year to 10-year sector, the focus of
ECB purchases, is about E1 trillion for Italy and Spain combined,
Barclays estimated.

“I doubt that intervention will be enough to turn things around,
especially if the growth environment continues to deteriorate,” said
Valli of UniCredit.

** Market News International Washington Bureau: 202-371-2121 **

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