By James Saft
(Reuters) – The most telling thing the ECB did on Wednesday’s leap day wasn’t the 530 billion euros in party favors they handed out to banks, but rather the paltry sum they were forced to commit to shoring up Portugal’s government bond market.
Around 800 euro area banks availed themselves of the three-year loans offered by the European Central Bank, money many analysts expected to be recycled into euro area government bonds. It was a clever plan: keep the banks alive with easy money and they in turn will support the ailing governments on Europe’s periphery, pocketing the spread.
It doesn’t seem to be working out that way, at least in Portugal’s case. Portuguese borrowing rates have remained stubbornly high and on Wednesday spiked higher, with 10-year borrowing rates above 13 percent. That brought the ECB into the market to make its first purchases of government bonds in two weeks.
It may be that Portuguese banks are simply too weak to indulge in the government bond carry trade – after all they themselves have been unable to sell debt for two years. That being the case, there are simply no natural buyers of Portuguese risk left, save the ECB, and it may well be that the more the ECB buys the less anyone else will want to.
The hilarious thing – or tragic, depending on your world view – is that all of this happened just a day after the so-called Troika – the European Commission, European Central Bank and International Monetary Fund – gave their blessing to Portugal’s progress in starving itself back into growth.