ECB kept interest rates at record lows

The European Central Bank kept interest rates at record lows as investors seek to President Jean-Claude Trichet, for an announcement about how the bank combat the worsening crisis of sovereign debt.

ECB officials in Frankfurt to set the benchmark interest rate to 1 percent for a month 20, as predicted by all 52 economists surveyed by us. The focus is now on Trichet press conference 2:30 pm and if you do more to stop the spread of the crisis, including expanding the provision of liquidity by the ECB banks unlimited and significantly increases gradual purchases of bonds, which are supposed to be temporary measures.

"We do not believe in the massive purchase of bonds, probably thinking that's more excited about the markets," said Carsten Brzeski, economist at ING Groep NV in Brussels and former European Commission official. "The change in direction would be extreme and not the ECB's task is to solve the problems of the country's solvency."

Trichet has been forced to a radical change of position before. On 6 May, as the crisis in Greece, the budget was fueling investor concern about the fiscal health of other nations in the euro zone, he resisted pressure to use the new measures, saying it was a government to lead the road. This lack of action triggered a selloff in the bond market, forcing the ECB to start buying public debt and only four days after causing a fracture to the Board of Directors.

"Carry The Show '

Trichet is in a similar position today. Investors have been dumping Irish, Greek, Portuguese, Spanish and Belgian assets after the bailout of the European Union led by Ireland not to convince policy-makers have the tools or the will to contain the crisis.

"The ECB actually wants to focus on their core business, but not be allowed," said Nick Kounis, chief economist of the euro-region of ABN Amro NV in Amsterdam. "Politicians must act together, but until they do, the ECB is left trying to carry the show with this type of facilities that are not the solution to the problem."

Bonds, stocks and the euro today extended yesterday's rally in the markets interpret Trichet's comment as a sign of political leaders can strengthen their response. Trichet told the European Parliament on the night of 30 November that some investors are underestimating the resolve of governments to protect financial stability in the currency bloc.

Bond purchases

The euro recovered more than $ 1.31 and Spanish government bonds 10 years, broke a 11-day fall, sending the yield up to 5.20 percent today from 5.50 percent on Nov. 30. That's still 239 basis points more than the yield of comparable German bonds.

It would be "more reasonable" for the ECB to buy bonds from the Spanish government, news agency Efe quoted Spanish Industry Minister Miguel Sebastian, as saying yesterday. He said the debt was shopping "within the orthodoxy" of central banks and the Bank of England and the Federal Reserve is following this policy, Efe reported from Moscow.

Increased their purchases of bonds, or resort to direct quantitative easing is not sterilized, the ECB would take more risks on its balance sheet and open to the burden of financing the profligate nations.

These measures can be resisted by a group in the ECB 22 - member council headed by Bundesbank President Axel Weber, a leading Trichet to replace the front of the bench next year.

Weber's opposition

Weber opposed the voucher program when it was announced on 10 May and has since called for was canceled, and said it represents "risks to price stability" and there is evidence that it works.

"The risk associated with purchases of bonds is that credit risk does not disappear," said Holger Sandt, chief European economist at Capital Markets WestLB in Düsseldorf. "If the worst comes to worst, the ECB has all these risks on its balance sheet. It's really a job to rescue the political sovereign."

Weber and policymakers, as a member of the Executive Committee of the ECB, Juergen Stark, are also pushing for the bank to resume its withdrawal from cheap loans to banks as the economy improves. The phasing of the measures of liquidity "will continue" after the end of the year, Stark said on 16 November.

The ECB publishes its latest forecasts today. You can show recovery in the euro area continues next year as Germany, the largest economy in the region, thrives on export demand and increased household spending.

Next Step Exit

The ECB currently offers banks as much money as they need in its benchmark rate for periods of one week, one month and three months. Last month, Trichet said the ECB will announce new measures for their removal from non-standard measures in December due to concerns that banks are becoming "addicted" to the abundant liquidity.

The next likely step in output announced a return to an auction procedure for loans of three months, said Klaus Baader, an economist with the euro area co-chairman of Societe Generale in London. This may limit the number of banks are able to borrow and result in a higher interest rate.

"The ECB is killed in action unwind" so that an interruption of the full allotment in its financing operations to three months "is still likely, though just barely," said Baader. "You could give a clear date for decision making, but are not applied immediately. This is a compromise that would benefit everyone."

"Adding to the alarm"

Even a step in that direction most unnerving investors and risks exacerbating tensions in the market, said Ken Wattret, chief economist for the euro area at BNP Paribas in London. "If the ECB really goes ahead with the output or even signs that will go ahead with the output, which will add to the alarm."

Morgan Stanley economists Joachim Fels and Elga Bartsch, said in a research note that there is a "good opportunity" for the ECB to change its output and reintroduce unlimited 12-month loans to banks.

Saying that it will also buy more debt to calm markets, said Holger Schmieding, chief economist of Joh Berenberg Gossler & Co. in London.

The ECB has already increased its activity, last week the purchase of most of the bonds in two months. Yesterday the Irish government bonds purchased in larger quantities than they normally do, according to two people with knowledge of the transactions.

In general purchases until total of 67 million euros ($ 88,000,000,000), well below the amounts purchased by the Bank of England and Federal Reserve.

"To avoid the risk of a market panic that the ECB can do more and should buy more government bonds," said Schmieding. "If the patient is at risk of a heart attack, a drug with side effects is warranted."