The European Central Bank reactivated two of its tried and trusted anticrisis measures Thursday in an effort to stave off an impending liquidity crisis among the euro zone's banks.
President Jean-Claude Trichet, chairing his final press conference at the end of eight years at the helm of the ECB, said the bank would restart its buying of covered bank bonds in November, and would hold two separate tenders of year-long refinancing to euro-zone banks. The ECB had resorted to both of these measures first in 2009, at the depths of the financial market troubles that followed the collapse of Lehman Brothers.
Mr. Trichet said the bank will buy up to €40 billion ($53.39 billion) in covered bonds issued by banks, starting in November. The bank will make its purchases in both the primary and secondary markets, and expects to have to completed the program by October 2012.
The ECB's decision came only an hour after the Bank of England decided to ease its monetary policy, committing to buy £75 billion ($115.95 billion) of U.K. gilts in an effort to depress long-term interest rates.
The outcome of the ECB's policy meeting had mixed effects on European markets. By 1230 GMT, the euro had stabilized, after falling, at around $1.3285, while the German December bund futures contract was down 0.19 at 136.87. The EuroStoxx was up 0.9% on the day at 2198.8, but down from 2218.73 immediately before the press conference started.
In addition, the ECB will offer a 12-month tender of liquidity in October and a tender with an approximate maturity of around 13 months in December. Both will be of an unlimited size. The rate of both tenders will be fixed at the average rate of the bank's weekly Main Refinancing Operations over the lifetime of the tender.
Furthermore, Mr. Trichet said the bank will continue to offer unlimited liquidity at its one-week, one-month and three-month operations at least until July next year. The measures "will continue to ensure that euro-area banks are not constrained on the liquidity side," Mr. Trichet said.
The loss of access to funding markets, a problem that has gained in intensity over the summer, has threatened the existence of one of Europe's largest banks in recent days, bringing French-Belgian lender Dexia to the verge of collapse.
However, Mr. Trichet said it would be inappropriate for the ECB to lend to Europe's main bailout vehicle, the European Financial Stability Facility. A number of both U.S. and European politicians—not least the European Union's Economic and Monetary Affairs Commissioner Olli Rehn—have urged that the EFSF be given a banking license, which would allow it to borrow from the central bank. However, a number of ECB officials have said this would break the terms of the EU treaty on monetary financing of governments.
"We consider that governments have all capacity to leverage the EFSF themselves," Mr. Trichet said. "We cannot substitute ourselves for governments."
Mr. Trichet again blasted governments for their "inadequate" governance of the euro zone over the first decade of the common currency's life. He called on them to show "inflexible determination" to safeguard their own credit and speed up structural reforms, particularly in their labor markets.
Elsewhere in his introductory comments, Mr. Trichet said the risks to the economy "remain to the downside in an environment of particularly high uncertainty," whereas the risks to medium-term price stability remain "broadly balanced."
"Unfavorable effects on financial markets are likely to dampen the pace of growth in the second half of the year," Mr. Trichet said, but gave no hint that the bank expected a recession.
Earlier Thursday, the bank had left its official interest rates unchanged for the third month in a row, leaving the key refinancing rate at 1.5%. Mr. Trichet said the council had taken its decisions "by consensus," rather than unanimously. He said that the council had discussed, but decided against, cutting interest rates.
The ECB tailors its official rates according to the medium-term outlook on inflation, which Mr. Trichet described as "broadly balanced" Thursday. By contrast, it prefers to use "nonstandard" measures, such as longer refinancing tenders, to deal with dysfunctional markets on an immediate basis.
Mr. Trichet said the ECB's latest data confirmed the impression that inflation, which touched 3% in September, will continue above its medium-term goal of 2% for the next few months, but will decline thereafter.
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