September 7, 2012 in Business

ECB rolls out finance plan

Aggressive bond buying key to deal
David Mchugh Associated Press
 
Wall Street surges

On Thursday, the Wall Street market ascended swiftly. The Dow Jones industrial average hit its highest mark since December 2007, and the Standard & Poor’s 500 index soared to its highest level since January 2008 in a rally that seemed destined to mark a milestone: American stocks have come almost all the way back.

A long-anticipated plan to support struggling countries in the European Union provided the necessary jolt, and the gains were extraordinarily broad. All but 13 stocks in the S&P index were up. European markets surged, too.

FRANKFURT, Germany – The European Central Bank unveiled its most ambitious plan yet to ease Europe’s financial crisis with a plan to buy unlimited amounts of government bonds to help lower borrowing costs for countries struggling to manage their debts.

Large-scale purchases of short-term government bonds would drive up their price and push down their interest rate, or yield, taking some pressure off financially stressed governments such as Spain and Italy.

After the ECB plan was announced, the yields on government bonds across Europe fell and stock markets rallied.

“This is a potential game-changer,” said Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics. “This is the first time the ECB has committed its balance sheet in this way. And the way it is done is politically sustainable in Europe.”

Other analysts cautioned that while the ECB plan would provide short-term relief to European countries and financial markets, it doesn’t address underlying economic weakness across the region, which could persist for years.

Put simply, buying government bonds does not stimulate growth, which has been hurt in Spain, Italy and other countries, in part, by the need to rein in government spending.

Six countries in the eurozone are in recession – Greece, Spain, Italy, Cyprus, Malta and Portugal – and unemployment across the region is 11.3 percent.

The ECB revised lower its economic forecast for the 17-nation eurozone economy on Thursday, saying it would shrink between 0.2 percent and 0.6 percent in 2012. The bank left its benchmark refinancing rate unchanged at 0.75 percent, a record low.

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