PARIS (MNI) – The European Central Bank, bowing to intense market
pressure that has hammered the euro and threatened the very foundations
of the Eurozone, announced early Monday morning that it will buy
government and private sector debt in the hope of stabilizing segments
of the market it described as “dysfunctional.”

The ECB said it will launch a “Securities Markets Programme,”
buying up debt in volumes and on terms that will be decided by the
bank’s Governing Council. The central bank said the program would not
alter its monetary policy stance, because it would sterilize the
securities purchases with liquidity re-absorbing operations.

For the past several weeks, markets would settle for nothing less
than a government bond buying program, which the ECB has long resisted.
There was little appetite for such a program on the Governing Council,
but some well-placed sources told Market News International last week
that they could envision the bank being forced into such an action
should circumstances in the financial markets get bad enough.

After Jean-Claude Trichet said last Thursday that the issue of
buying bonds had not even been discussed by the Governing Council, the
euro plummeted to a 14-month low and the spreads on debt securities of
virtually every Eurozone state widened against the German Bund.

The chaos and panic in markets of the last two days was clearly the
last straw – leading not only the ECB but also European Union finance
ministers to take unprecedented emergency measures.

The EU finance ministers announced early Monday morning that they
had agreed on a E720 billion stabilization fund that would provide loans
— with strict conditions — to Eurozone nations that might need it in
the future.

The Eurozone will put up E440 billion, the EU E60 billion and the
International Monetary Fund E220 billion.

The ECB also said it was conducting two fixed-rate full allotment
3-month refinancing operations on May 26 and June 30, and one fixed rate
full allotment 6-month operation on May 12. It had only recently
eliminated the 6-month operation altogether and returned to regular
competitive bidding on the 3-month operation.

In addition, the ECB said it would re-open U.S. dollar swap lines
with the U.S. Federal Reserve, in conjunction with other major central
banks. It will resume 7-day and 84-day U.S. dollar liquidity operations,
which it had also ended.

–Paris newsroom,+331-42-71-55-41; bwolfson@marketnews.com

[TOPICS: M$$EC$,MGX$$$$,M$X$$$,MT$$$$,M$$CR$]