Yesterday ECB President Mario Draghi explained that downside risks to the euro zone economy remained and the ECB is not preparing to head for the exits with its support for LTRO (Long Term Refinancing Operation) to stabilize the European financial market.
“Inflation expectations are firmly anchored and with unemployment at an historic high, any exit strategy talk for the current time is premature” Draghi said in a news conference.
Near the climax of the Euro zone debt crisis in late 2011 when bond yields from indebted countries in Europe were rising to unsustainable levels, the ECB expanded its balance sheet by 30% and injected over 1 trillion euros ($1.3 trillion) through its 3 year long term re-financing operation (LTRO). The euros were injected into the European financial market in December and February to help stabilize the financial sector and dispel concerns of a default.
LTRO has mostly proven to be successful thus far, providing global markets with some needed assurance that the ECB is willing to offer liquidity to help ease the credit tension caused by heightened capitalization requirements for Europe’s banks while simultaneously reducing volatile bond yields of southern European countries.
Until yesterday bond yields from heavily indebted countries like Spain, Italy, Portugal, and Greece have been kept to low and sustainable levels.
But that all changed yesterday when Spain’s bond auction failed to impress and only 2.59 billion euros worth of Spanish bonds were sold, narrowly meeting the minimum amount targeted.
Following yesterday’s Spanish debt auction, yields on Spain’s ten-year bonds jumped to 5.6 percent, the highest level in three months. Global equity markets reacted sharply with heavy selling.
Last week, some ECB officials made comments that resulted in speculation about the need for the ECB to preserve its balance sheet and remove liquidity support with LTRO for the European banking system.
Yesterday, ECB President removed the swirling speculation and made it clear that the ECB was not planning to exit from it commitment with LTRO.
Draghi later admitted that rising prices for fuel and other commodities was adding to inflationary concerns but he emphasized that price stability must be maintained. Draghi explained that the ECB through its own mandate would help to contain inflation.
He said that the burden is now on European governments to push through economic reforms that will help to revitalize their economies.
The ECB governing council agreed yesterday to hold interest rates at the record low level of 1%.
Currently, Spain’s yield on the 10 yr. bond continues to rise and is at 5.79%. Spain’s 2 yr. bond yield is 2.96%.