PARIS: The prospect of the European Central Bank buying up short-term debt from struggling eurozone countries has led to a sharp fall in borrowing costs but does not solve long-term problems, analysts said Tuesday.
The drops on the bond market have been considerable: the rate of return for investors on Spanish two-year bonds has fallen to three percent from above seven percent at the end of July.
And the yield on Italian two-year bonds has fallen to two percent from five percent a little over a month ago. Rates on even shorter-term debt of bailed out countries such as Greece, Ireland and Portugal have fallen as well.
"It is the Draghi effect," said Credit Agricole Corporate and Investment Bank economist Frederik Ducrozet.
He said the easing of tensions on the government bond markets is a sign that investors have high hopes that Draghi will provide details of possible ECB action after a regular monthly policy meeting on Thursday.
ECB chief Mario Draghi indicated over the summer that the central bank may help struggling eurozone countries under a bailout programme by buying up their short-term debt.
On Monday evening in a hearing before the European Parliament Draghi went a bit further according to lawmakers, saying the ECB purchases could go up to three-year maturities.
"He wants to show that (the intervention) will remain within monetary policy and is not financing states," said Ducrozet.
Ducrozet said setting the limit at three-year maturities is likely tied to the three-year loans it provided banks.
The ECB already pumped more than one trillion euros ($1.25 trillion) into the banking system via three-year funding operations in December and February.
While the injections led to a temporary easing of tension in the eurozone crisis, the ECB has been concerned that the measures failed to boost lending to companies in fragile eurozone countries where borrowing costs remain high.
ECB officials have said the interventions would aim to improve the transmission of monetary policy, as opposed to underwrite spend-thrift governments.
The ECB's previous government bond-buying programme, in which it bought over 200 billion euros in eurozone state debt, proved highly controversial, with the head of Germany's Bundesbank and a German ECB official resigning in protest.
Nevertheless the prospect of ECB intervention come as a relief to struggling eurozone countries, that have been paying high borrowing rates, and nervous investors who have been accepting losses to buy up safe-bet German and French bonds.
A drop in governments' short-term borrowing costs should help reduce loan costs to businesses as they are often tied.
And an ECB intervention on the short end "would permit these countries to increase their borrowing programmes on these maturities," said markets strategist Patrick Jacq of BNP Paribas.
But Spain and Italy have most of their debt in longer maturities, on average seven years for Spain and eight years for Italy, leaving the nations with only a limited scope to take advantage of lower short-term rates.
And shifting too far to shorter maturities might set up a problem for a couple of years down the line when it comes time to roll over the debt.
Longer term rates meanwhile have crept down, but not as much.
On the secondary markets the rate of return on Spain's benchmark 10-year debt fell to 6.605 percent on Tuesday from 6.853 percent late on Monday, while Italian benchmark yields fell to 5.665 percent from 5.771 percent.
"The market believes that the ECB will act but it is not convinced that it will suffice to lower long rates," said Ducrozet.
And ECB intervention "isn't a miracle tool," said Natixis strategist Rene Defossez.
Instead it will help buy time while countries address their fiscal problems under a rescue programme that is one condition the ECB has set for intervention.
"The causes of the crisis are much more important," said Defossez.
ECB intervention "will treat a very small part of the problem but it won't be what helps the eurozone overcome" the crisis, he added.
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