European finance ministers took two major actions today amid a darkening regional debt crisis: The Bank of England announced that it will buy £75 billion of government bonds in a new round of "quantitative easing" to stimulate the U.K.'s sluggish economy, and the European Central Bank decided to leave its benchmark interest rate unchanged at 1.5 percent for a third straight month (Britain also left its interest rate unchanged). Neither move is particularly surprising (though the British action came earlier than expected), bur markets appear to be reacting positively. Bloomberg reports that U.S. Treasuries are falling "for a third day as speculation European leaders are stepping up efforts to resolve the debt crisis reduced demand for the safest assets." Traders, in other words, are now more willing to take risks.
The Wall Street Journal explains that the U.K. has hinted for some time now that it would embark on a second round of quantitative easing because it's facing an "ailing economy menaced by a sovereign debt crisis in Europe, weak consumer demand at home and a slowdown in activity overseas." As for the E.C.B., analysts today seem to agree that outgoing president Jean-Claude Trichet is resisting calls to cut interest rates in order to tamp down inflation, which has risen in the euro area rose to an estimated three percent--well above the E.C.B. target of two percent. Trichet hinted that another E.C.B. rate cut isn't far off, however.
These two measures are grabbing most of the headlines, but the positive response from the markets may actually have more to do with what European officials are saying about how they'll address diminished confidence in the region's banks, which are exposed to shaky sovereign debt. As The New York Times points out, the E.C.B. also announced today that it will resume offering banks unlimited loans at its benchmark interest rate for a year and purchasing "covered bonds" that help banks raise much-needed cash. European Commission President José Manuel Barroso announced today that he supported bank recapitalization across the euro zone--a vague scheme that has been dubbed "Euro-TARP" and has yet to be fully fleshed out by the various European officials who have expressed support for it in recent days.
Still, Steven Erlanger argues at the Times that all these measures may not be enough to extricate Europe from its debt crisis. Europe, he explains, has not had its "own Lehman Brothers, at least in the sense that Lehman shocked Americans to take divisive and expensive steps to repair the damage. Instead, it has seen a slow-motion leak of confidence and a steady drain on credibility that has extracted a large and growing toll on stock and bond prices and on the livelihoods of its citizens." Barring a Lehman-level crisis, he asserts, it appears the region's simmering financial woes will continue to beget half-measures:
An uncontrolled Greek default or a run on a major European bank could still overturn expectations and compel France, Germany and the European Central Bank to act with much greater urgency. But for now, political and financial leaders are buying time, putting out fires one by one, like propping up Dexia Bank, and making vague promises, as European officials did Wednesday, about scheduling new meetings to discuss the recapitalization of European banks.