Forex News – ECB steps in to buy bonds to support euro

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ecbThe euro has been resilient despite all the turmoil in the markets and surging bond yields threatening to deepen the sovereign debt crisis. As the future of the euro hangs in the balance, the European Central Bank is increasingly relied on for Europe’s survival.

 

Today Italian and Spanish bond yields moved below dangerous levels as the central bank stepped in to buy these indebted countries bonds. Those helped ease investor jitters and calmed markets, giving a boost to the euro.

 

The single currency is being supported by market talk that the ECB will lend money to the International Monetary Fund, which in turn will lend to euro zone governments.

 

The reason is because the ECB cannot lend directly to EU countries as it is beyond its legal mandate. The ECB was originally set up as an institution to foster price stability in the union and not to prop up the borrowing power of fragile nations, which it is somehow leaning towards these new powers.

 

France and Germany are squabbling over the proposal to allow the ECB to lend money to the IMF because Germany says it would result in the ECB losing its independence.

 

However, in the short term this proposal addresses investor concerns and creates calm. The long term view is cause for concern, since the question arises how will the IMF protect its exposure to risky euro zone debt.