The European Central Bank has done the right thing by intervening in Italian and Spanish bond markets. And far from earning the "too little, too late" tag that many of the actions of its political colleagues have earned, the ECB was right to wait.
Italian 10 year yields dived from last week’s highs of up near 6.4% to a shade under 5% during Tuesday morning. Spanish bonds have also benefited, down from similar highs last week to around 5.1% on Tuesday.
If anything, European government markets now look an oasis of calm compared to a US Treasury market that — according to Standard & Poor’s — is more likely than not to suffer a further downgrade. Equity markets, meanwhile, look more like the burning wrecks of South London shops than the sophisticated bourses of international capital flows.
The wisdom in the timing is threefold. Firstly, had the ECB stepped in earlier, say when markets were more liquid, it would have needed to pump far more cash into the system to suppress yields. Traders have been keen to point out that it takes very little trading to effect a big price move throughout the crisis when talking about stricken credits. The ECB was right to wait until there was a genuine problem before whipping its chequebook out and saved some money in the process.
Moreover, it is understood that the ECB was keen to extract firmer commitment from Europe’s politicians in forcing their economies to cut debt and generate growth. Those two things do not always occur in tandem but the ECB was right to ask. Politicians have been slow to grasp the severity of the European debt crisis and slow to act at all, let alone in adequate measure.
By holding out until Silvio Berlusconi was forced to back down from pointing the finger at “speculators” and impose emergency economic reforms, the ECB has made Europe’s leaders take the medicine. That will serve everyone better in the long run.