The European Central Bank resisted pressure on Thursday to commit to a major bond-buying program to contain the euro zone debt crisis, but traders said the ECB had been quietly buying bonds anyway.
ECB President Jean-Claude Trichet said the bank had decided at its monthly policy meeting to keep interest rates on hold and it extended its liquidity safety net to support vulnerable euro zone banks.
He made no mention of increasing the ECB's government bond buying program, despite calls to do so after an 85 billion euro ($110.7 billion) EU-IMF rescue of Ireland failed to dispel fears that Portugal or Spain may need a bailout.
I say we are constantly alert. We are constantly looking at the situation of the markets, Trichet told a news conference.
But referring to a bond-buying policy that the ECB started after Greece was bailed out in May, he said: The Securities Market Program (SMP) is ongoing, I repeat -- ongoing ... I won't comment on the observations of market participants.
Suggestions before Thursday's meeting that the ECB could agree new anti-crisis measures had helped the euro stabilize and lifted stock markets, despite lingering concerns about Spain and Portugal.
Adding to those concerns, Standard & Poor's warned late on Thursday that it may downgrade Greece's BB-plus credit rating in three months if it becomes clear that Europe's new mechanism to stabilize the debt crisis would favor public creditors to the detriment of private bond holders.
The failure to announce any major new action worried some economic analysts. But others' disappointment was tempered by the reports of ECB purchases of Portuguese and Irish bonds, which caused a drop in the premium that investors demand to buy these countries' debt over German benchmarks.
ECB bond buying, one trader said, has been bigger than the last couple of weeks, since yesterday. Yesterday and today have definitely been bigger than usual.
Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto, said Trichet had not set a limit on the bond-buying program and this suggested the option of further bond purchases was not necessarily off the table at all.
Morgan Stanley said in a research note that market hopes of a far-reaching announcement on bond purchases had been disappointed but: At the same time, it seemed that ECB has continued to step up the pace of its purchases under the SMP.
EURO IN DANGER?
Some economists say the future of the euro is in doubt because of the sovereign debt crisis and fear contagion to Asia and the United States.
International Monetary Fund chief Dominique Strauss-Kahn, visiting India, said the situation in Europe was serious and the IMF was ready to provide financial and technical support to member states if needed.
But EU leaders deny the euro will collapse and dismissed reports on Thursday that they would call a special summit this weekend on the crisis.
A Spanish bond auction was well received, partly because of hopes linked to the ECB meeting, and German Economy Minister Rainer Bruederle said there was a good chance Lisbon and Madrid would not need rescuing.
Spanish Prime Minister Jose Luis Rodriguez Zapatero also said Madrid would not need to tap any European Union funds to help it through its debt problems, but called for a much more integrated fiscal policy for the euro zone.
What Spain advocates is that if we have a single currency, it's not enough just to have a central bank, a single central bank. It's not enough to have a single monetary policy. We also need to have a common economic policy, Zapatero said.
Germany has defied calls by France and others to turn the euro zone into a fiscal union, a step that could help the bloc address its economic imbalances but require members to sacrifice sovereignty for the good of the group.
There are also divisions in the ECB. Bundesbank head Axel Weber has called for the bond-buying program to be scrapped and fellow ECB members have criticized the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt.
Germany's Bruederle said before the ECB's meeting that extra liquidity alone would not resolve Europe's problems.
Permanently printing money is not the solution ... The money presses must not fall into the hands of politicians, he said.
(Writing by Timothy Heritage; Editing by Jon Hemming and Diane Craft)