ECB may come to eurozone rescue again as Spain bailout fears intensify

The European Central Bank may have to ride to the eurozone’s rescue again very soon, analysts said yesterday, as Spain looks set to be the next country sucked down by the never-ending debt crisis.

... Europe has less of a debt problem than a confidence crisis...

“Without substantial ECB action, the eurozone may soon lose the ability to control the market panic,” Berenberg Bank economist Christian Schulz wrote to investors.

Spanish borrowing costs have soared to dangerously high levels and bailed-out Greece’s rescue programme appears to be on the rocks just as the the sovereign debt crisis took another turn when ratings agency Moody’s warned it could strip euro kingpin Germany of its coveted triple-A rating.

Moody’s argued that Germany – Europe’s biggest economy which has fared relatively well since the start of the crisis – faces increasingly incalculable risks in a possible Greek exit from the eurozone and soaring costs of potential bailouts for Spain and Italy.

After Greece, Ireland and Portugal were all compelled to seek aid from their European partners, the single currency area’s woes are showing no signs of abating, with Spain expected to be the next domino to fall.

Mr Schulz said Moody’s action laid bare “the limits of Europe’s current strategy” and the ECB, the only player currently capable of acting fast enough, will need to don its fire-fighting helmet once again.

With the eurozone’s public debt and deficit levels well below those of the US and Japan, Europe has less of a debt problem than a confidence crisis, the analyst said. And that was “largely because of the reluctance of its central bank to intervene forcefully in market panics. Moody’s rating action may bring the end to this reluctance a little closer,” Mr Schulz argued.

Right from the start of the crisis, the ECB has not hesitated to launch a series of emergency measures. The central bank quickly reversed last year’s rate hikes and earlier this month cut eurozone borrowing costs to an all-time low of 0.75 per cent.

It embarked on a hotly contested programme of buying up the bonds of debt-mired countries. And in two long-term refinancing operations in December and February, it pumped more than €1 trillion into the banking system to avert a dangerous credit squeeze in the 17 countries that share the euro.