FRANKFURT (MNI) – The ECB may be forced to keep up stronger bond
market intervention as Eurozone leaders’ clash over fiscal solutions to
the sovereign debt crisis, but expectations of massive interventions in
the near-term are may yet be disappointed.

The ECB stepped up bond purchases in the first part of last week to
E1.965 billion, the highest level since early July, data released by the
central bank Monday confirmed. ECB buys on Thursday and Friday, not yet
reflected in today’s data, were far more aggressive, traders said.

The future course of the ECB’s bond purchasing under the Securities
and Markets Program is less certain, even if ECB President Jean-Claude
Trichet did seem to suggest that the door was open to a higher volume of
purchases when needed.

Trichet assured that the program is “ongoing” and its amount is not
limited. He also said that ECB bond buys going forward will be
“commensurate” with the malfunctioning of the markets.

There has been some speculation that the word “commensurate” may be
new code language reflecting a change in strategy towards a more active
attempt to keep spreads down at levels “commensurate” with fundamentals
rather than only intervening when new records are being tested.

In the ECB’s view, current level are not in line with fundamentals,
Trichet made clear last Thursday, pointing out that on an aggregate
level the “euro area is in much better shape than the other big advanced
economies as regards public finance deficits.”

Even if the central bank will help force markets closer to
reflecting fundamentals, the ECB is clearly not ready to give Eurozone
governments a blank check. This is a crisis of public finances and it is
for fiscal authorities to sort out.

The ECB encourages “governments to go as far as possible in being
commensurate to the challenges. This is true in all domains,
quantitative as well as qualitative,” Trichet said last week.

The European Financial Stability Facility (EFSF) is likely to be
one of the domains Trichet had in mind given rising market concerns that
the funds available will not be enough to bail out some of the larger
peripheral countries and their banking systems.

On Monday, Lorenzo Bini Smaghi called for an increase should it
prove necessary. “For now we’re using only a part. But if needed, it
should be increased, of course.” Guy Quaden explicitly expressed his
support for expanding EFSF funds. Earlier Axel Weber had said he is
confident political leaders “will do more” on aid if necessary.

Political leaders are certainly under growing pressure to “do more”
but once again they lack agreement on how best to proceed. The
disagreement politicians displayed as they went into meetings with ECB
President Jean-Claude Trichet and International Monetary Fund Managing
Director Dominique Strauss-Kahn, are unlikely to reassure markets.

Expanding the EFSF’s funds — as favored by ECB policy makers — is
one option under consideration. Belgian Finance Minister Didier Reynders
on Saturday also suggested increasing EFSF funds in the near term.
However, his proposal was quickly rejected by Berlin and Madrid.

“We currently do not see any necessity at all to increase the
volume of the euro rescue umbrella,” a German government spokesman said.
“Injecting additional resources into the fund is not the issue of the
moment” Spanish Finance Minister Elena Salgado seconded.

Eurogroup head Jean-Claude Juncker and Italian Finance Minister
Giulio Tremonti, in an opinion piece published in Monday’s Financial
Times, raised the alternative option of a common eurobond to help calm
market concerns. Germany quickly reasserted its longstanding opposition
to commonly underwrite debt.

Unsurprisingly then, the euro plunged and peripheral yield spreads
over Bunds rose after being kept in check by ECB bond buying late last
week, as clashing ministers headed for their meeting in Brussels.

Failure to step up support measures in time, in conjunction with
ongoing public disaccord, will only intensify market tensions further
and may force the ECB into more aggressive action in the weeks ahead as
the central bank’s response will be “commensurate” to the level of
distress.

Still, the ECB’s insistence on governments to do their part
suggests that the central bank is likely to refrain from massive
pre-emptive intervention that could take the pressure off governments to
drive forward common fiscal solutions for the sovereign debt crisis.

Today’s relative absence of the ECB in the sovereign debt market —
with traders saying the central bank only bought a limited amount of 5-
and year Irish and Portuguese government bonds — also suggest that the
bank may not have significantly changed tactics.

–Frankfurt newsroom +49 69 72 01 42; e-mail: jtreeck@marketnews.com

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