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European Intervention Buoys Italy and Spain

Monday, 08 August 2011 05:06 By David Jolly, The New York Times News Service | Report
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Paris - The interest rates on Spanish and Italian bonds plummeted Monday after the European Central Bank expanded its purchases of government debt to support Madrid and Rome for the first time.

Stocks, however, fell in Europe and Asia, the dollar continued to weaken against most major currencies and gold topped $1,700 for the first time following the decision by Standard & Poor’s to lower its top-notch credit rating for the United States. Trading in index futures suggested a poor start for Wall Street as well.

As European markets opened, the yield on 10-year Spanish bonds dropped by 83 basis points, while comparable Italian yields fell 79 basis points. News agencies cited traders as saying the E.C.B. was intervening in the secondary market to buy the securities from those two countries.

The E.C.B. declined to comment Monday. But in a statement issued late Sunday after an emergency conference call, the central bank said it would “actively implement” its bond-buying program to address “dysfunctional market segments.” It did not specify which bonds it would buy, but hinted it would be Spain and Italy by welcoming their efforts to restructure their economies and cut spending.

Previously the bond-buying had been limited to bonds from Greece, Portugal and Ireland — the three euro-zone countries that have already received international bailouts. Fears that the bloc’s sovereign debt crisis would spread to the much bigger economies of Italy or Spain had contributed greatly to recent market losses.

European leaders agreed last month to revamp their bailout fund to allow it to purchase bonds on the secondary market, but those powers still have to be drafted and ratified by national parliaments, which will take weeks, at best.

At least until then, the E.C.B. has been reluctantly saddled with the primary role in addressing the crisis of confidence in the region’s government finances. The bank got backing late Sunday from the Group of 7 leading industrialized nations, which said late Sunday that it was ready to “take all necessary measures to support financial stability and growth.”

Gilles Moëc, an economist in London with Deutsche Bank, said the central bank’s move was “not a silver bullet,” especially considering the impact of the U.S. downgrade and lingering concerns about the economic recovery there.

Still, he described it as another positive development for European cohesion.

“For all their delays and contorted procedures, the European partners since the beginning of this crisis have always moved, ultimately, in the same direction: creating evermore financial solidarity across its members, and breaking taboo after taboo to do so,” he wrote in a research note.

European equities opened higher despite a sell-off earlier in Asia, but the rally fizzled, dashing hopes that the E.C.B.’s actions would be enough to soothe broader market jitters.

In afternoon trading Monday, the Euro Stoxx 50 index, a barometer of euro zone blue chips, was down about 1 percent. Financial shares, which had been up by as much as 5 percent earlier, retreated into negative territory. The FTSE 100 index in London fell nearly 2 percent.

The euro fell to $1.4263 from $1.4282 late Friday in New York. But the dollar hit new lows against the Swiss franc, declining to 0.7485 franc from 0.7674 franc, and fell to 77.65 yen from 78.40 yen, before recovering a bit.

Standard & Poor’s 500 index futures fell 2.4 percent, suggesting stocks would fall at the opening on Wall Street.

In Asia, the Tokyo benchmark Nikkei 225 stock average fell 2.2 percent. The main Sydney market index, the S&P/ASX 200, fell 2.9 percent. In Hong Kong, the Hang Seng index fell 2.2 percent, and in Shanghai the composite index closed 3.8 percent lower.

The U.S. downgrade and European debt crisis are not the only problems weighing on equities. The recovery in the global economy is lagging the expectations of many analysts, with the Organization for Economic Cooperation and Development reporting Monday that its composite leading indicators for June point to “a slowdown in activity in most OECD countries and major non-member economies.”

U.S. crude oil futures for September delivery fell 3.6 percent to $83.76 a barrel.

Stocks on Wall Street opened sharply lower Monday as nervousness over the downgrade of the United States’s long-term debt and Europe’s fiscal problems continued to hang over global markets.

Within minutes of the opening bell in the United States, the broader market as measured by the Standard & Poor’s 500-stock index was down 28.39 points, or 2.37 percent. The Dow Jones industrial average was down 232.65 points, or 2 percent, and the Nasdaq was down 65.43 points, or 2.58 percent.

Guy LeBas, chief fixed-income strategist for Janney Montgomery Scott, said the limited early declines suggested that the market had already factored in the downgrade.

“It is by no means a disaster,” Mr. LeBas said. And higher prices for bonds were “a testament to the fact that global investors view U.S. bonds as the safe-haven asset choice.”

The declines, if sustained through the trading session, are set to shave even more value from equity portfolios after last week’s declines, which made up the worst drop in a five-day trading period since November 2008. By last Friday, the S.&P. 500 had dropped 7.1 percent over the week and the Dow was down 5.7 percent.

While the decision late Friday by the ratings agency Standard & Poor’s to downgrade the United States’s debt rating one level to AA+ from AAA was likely to continue to reverberate, investors are also concerned about the weak United States economy and Europe’s debt problems.

The Treasury’s benchmark 10-year note yield was down to 2.47 percent from 2.56 percent on Friday.

The interest rates on Spanish and Italian bonds plummeted Monday after the European Central Bank expanded its purchases of government debt to support those countries for the first time.

Stocks, however, fell in Europe and Asia, the dollar continued to weaken against most major currencies, and gold topped $1,700 for the first time.

In Britain, the FTSE 100 was down 1.2 percent. The DAX in Frankfurt was down 2 percent, and the French CAC 40 was off 1.6 percent.

This article, "European Intervention Buoys Italy and Spain," originally appeared in The New York Times.

David Jolly

David Jolly covers business and finance from Paris. A Texas native and former U.S. marine, he has been with The New York Times organization since joining the International Herald Tribune as an editor in 1999. He previously worked for AP-Dow Jones News Service as a correspondent in Tokyo and New York.

David attended Western Connecticut State University, the School of International and Public Affairs at Columbia University and the University of London Institute in Paris.


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