FT: Italy and Spain respond to ECB treatment – relief for Rome and Madrid but for how long?

08 August 2011

Jean-Claude Trichet fired the European Central Bank's bazooka on Monday and the bond of markets of Italy and Spain rallied impressively. The question is whether the bank's intervention will be large enough, and sufficiently sustained, to prevent a further escalation of the eurozone debt crisis.

As financial markets digested news of ECB intervention – this time buying the debt of Italy and Spain, the world’s third-largest bond market and the eurozone’s fourth-largest economy respectively – Spanish benchmark 10-year yields fell by 105bp and Italy’s by 81bp.

But the size of both bond markets means the ECB intervention will need to be on a different scale from that of previous bond purchases. Spain’s bond market is bigger than that of Greece, Portugal and Ireland’s combined, at about €650bn. Italy’s bond market is smaller only than Japan’s and that of the US with its €1,600bn of bonds outstanding. For many in the markets, that makes the ECB intervention a meaningful first step to the solution they had long demanded.

Steven Major, head of fixed income research at HSBC, argues that German Bunds – the European safe haven asset – could suffer. “They might have some success in containing Italian bond yields. But it has a price. The price is higher German Bund yields”, he says.

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