Markets have crashed again, with investors fleeing for the hills after the first bout of what the European Central Bank is calling “technical stress” last week.
The collapse in oil prices since June and a subsequent slump in consumer confidence and spending all led to an unprecedented sell-off, forcing the ECB to impose a new stimulus program to revive the economy.
The European Central Banks new programme, called “Operation Twist”, involves buying bonds from banks and selling them to bondholders in an attempt to stabilize the markets.
In an interview with Bloomberg Television, the ECB’s head of monetary affairs, Klaus Regling, said he hopes the market can regain some confidence and investors can buy back some of their holdings.
He said the markets had been “very resilient” and the ECB would be “continuing to take action as needed” as it tries to stabilise the market.
The sell-offs are expected to last a month and the market has already slumped more than 20% since June when prices fell by more than 80%.
Regling said it could be two weeks before the ECB has another injection of liquidity.
But the markets are already struggling to get through the first phase of the crisis, with many holding out hope of a resolution soon, Reuters news agency reported.
Regling said the ECB is “very confident” it will be able to make good on its commitment to buy back bonds as long as the bond market has recovered.
He said the banks were “very happy” with the outcome of the bond buying and would continue to buy bonds in a “positive” way.
Market turmoilThe ECB will issue more than $2 trillion of new debt, with most of it being backed by assets such as real estate, banks, insurance and even gold.
Regulating the market is also a major priority, with the central bank seeking to reduce the volatility in financial markets and curb market speculation.
“We are in a crisis.
We need to make sure we’re managing that crisis responsibly and in a way that we can make sure that the market stays stable,” Regling told the Reuters newsagency.
“The markets need to stay in the game.”
Regling added that the ECB was not concerned about a possible contagion from the oil price crash, saying: “I don’t see any problem whatsoever.
This is a crisis of confidence.
We will be doing everything we can to stabilize markets and to ensure that the bond markets are supported and that the liquidity remains available.”
Oil prices fell sharply after the ECB announced a new programme to buy up debt.
The dollar was hammered as the ECB sold bonds at an annual rate of $US6.2 billion ($7.4 billion) to bond investors.
The oil price slump has sent bond yields higher, forcing investors to seek out cheaper options.
Reglling also said the market was in a recession, and was expected to remain so for some time.
“The next few months, we will be observing a very, very slow recovery,” he said.
The markets are also struggling to recover from the sharp fall in the value of the euro, with yields on government bonds tumbling by more 50 basis points to 4.3%.
The central bank said last week it was cutting its bond-buying programme to €6.8bn from €8.1bn, and is planning to raise the bond rate to 4% by the end of the year.
The ECB is also aiming to raise its benchmark interest rate, to 0.5% from 0.25%, to help spur economic growth.
The central banks bond buying program was introduced after the collapse of the eurozone in 2015, but has proved a failure.
Reglings comments came as the European Commission also unveiled a raft of measures to support the financial markets, including a €1.4 trillion plan to support banks and investors with additional liquidity.
Reglis plan will also include €3.4bn for an increase in the capital ratio of banks and €2.5bn for lending to banks.
The commission is also proposing to create a central bank credit union to help ensure that financial markets are not over-extended by banks, which it calls “a new form of a financial system.”
The plan is aimed at helping countries to avoid the same mistakes of the past when it comes to their banking systems.
“It is a major step forward in the battle against over-capacity in the financial sector, but it is still too early to know what will happen to the overall financial system,” Reglings said.
Reganding a return to normal”Regling also acknowledged that there were still a lot of hurdles to overcome before the European economy can return to its normal state.
He noted that the EU needs to create more jobs, strengthen the financial system, raise the growth rate and reform the labour market.
Regalling the fact that the euro area’s unemployment rate was still above 10%, he said the EU would not tolerate unemployment in the current situation.
Reglin said the euro zone needed to
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