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News : EU Economy Last Updated: Jan 11, 2011 - 5:15 PM

ECB intervenes in bond markets as Portugal remains under siege; Japan says it will purchase bonds issued by Eurozone bailout fund
By Finfacts Team
Jan 11, 2011 - 6:09 AM

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Herman Van Rompuy, President of the European Council and Jean-Claude Trichet, President of the European Central Bank, Brussels, Dec 16, 2010

The European Central Bank (ECB) intervened on Monday in Eurozone bond markets as fears that Portugal was moving closer to a bail-out grew. On Tuesday, Japan said it will purchase Eurozone bonds to boost confidence in the European Financial Stability Facility (EFSF) - - the region's bail-out fund.

On Monday, Portugal’s cost of borrowing rose to 7.18% for 10 year debt, close to record highs but yields later eased after ECB buying to close at 7.01%.

On Wednesday, Portugal's debt agency plans to auction bonds to raise in the range of €750m to €1.25bn, which is part of the €20bn in funding that it will have to raise in 2011.

Bloomberg says its existing 10 year debt has yielded more than 7% in 10 of the past 62 days, according to Bloomberg data. Greece needed a rescue within 17 days of its 10-year yield breaching 7% on April 6, while Ireland lasted less than a month after it cracked that level in October.

“Even if we see a successful auction, it doesn’t mean anything, because at rates above 7% it’s not sustainable,” Ioannis Sokos, a strategist at BNP Paribas SA in London told Bloomberg.
“It is inevitable that Portugal has to turn to the EU and IMF if they keep borrowing at these levels.”

Spain, Italy, the Netherlands and Germany will hold bond and bill sales worth as much as €42bn this week.

Data issued by the ECB on Monday showed that its purchases of government bonds slowed in the week ended Jan. 7, when pressure eased on peripheral countries in the aftermath of the holiday period.

The central bank bought government bonds worth €113m, down from €164m in the trading week leading to Christmas.

The ECB began buying bonds after the rescue of Greece in May and has spent about €74bn since then.

The euro at one point dropped to a four-month low against the dollar on Monday, falling to a mid Sept level of $1.2871 against the dollar, before rising to $1.2951 in New York.

Germany's top banker, Deutsche Bank's CEO Josef Ackermann said on Monday that Europe must not forget the benefits of the political and currency union following centuries of war and millions of deaths as the Eurozone is tested by the sovereign debt crisis.

“We need to see these tasks in a historical context,” Dr. Ackermann said, according to the transcript of a speech for Deutsche Bank’s New Year’s reception in Berlin.
“We can’t afford to forget this even during the ongoing fights over money, yes even lots of money.”

"This is not a crisis of the euro, which remains an internationally respected currency with a low inflation rate and a stable external value," he added. "It is a crisis of individual states which have budgetary problems -- problems that in a monetary union have to be solved together."

Japan is considering buying about 20% of Eurozone bonds to be jointly issued later this month by the EFSF to fund support for Ireland, using euros in its foreign reserves, Finance Minister Yoshihiko Noda told a news conference.

"I think it's appropriate for Japan to purchase a certain amount of bonds to boost confidence in the EFSF and make a contribution as a major country," he said.

Last week, China signalled that it would buy more Spanish bonds.

Guy Johnson reports from Lisbon as pressure mounts on Portugal to seek a bailout. The country is still led by a minority government. "We cannot have general elections until May...after May...the Prime Minister should step down," Teresa Caeiro, Portuguese opposition MP told him:

Willem Buiter, chief economist at Citigroup, said in Dublin on Monday that restructuring of both the banking sector and sovereign debt was “the likely eventual option” in a number of countries. Ireland is likely to become the first European state to go down this route, he added.

The Dutch-born economist is a former professor of European Political Economy at the London School of Economics and also a former member of the Bank of England's Monetary Policy Committee.

The Debt of Nations  - -  a report produced by Buiter and colleagues at Citi.

Citi comments in the report: "Again, Ireland stands out, with international liabilities equivalent to almost 16 times 2009 GDP."

This is not correct as data on obligations of units at foreign banks at Dublin's International Financial Services Centre, appears to have been  included.

Buiter may well come to a different conclusion if the used the relevant domestic data.

Gary Parr, vice chairman of Lazard, discusses Europe's debt troubles and more with "The Strategy Session" crew:

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