The Role of the European Central Bank in the Pan-European Debt Crisis - Article Example

The paper "Strong Demand for Spanish, Italian Debt by Emese Bartha" is an excellent example of an article on finance and accounting. This year, predictions are that the bond market of Spain and Italy will play a very crucial role in the whole European debt crisis. The European Central bank also has a key role in this situation.

Experts are calling it a ‘backdoor bailout’; the European Central bank lent half a trillion euros to local and regional banks. As a result, the Spanish Treasury has been able to raise 10 billion euros from auctioning three bonds. The yields have dropped by about 1% as Spain doubles its target of 5 billion euros. Italy is also looking very good after its 1st bond auction of 2012 where it paid less than half of what it had paid last year.  While reading the article, any person with basic financial knowledge can’t help questioning that why is it all sitting so well that ECB is injecting money into financially troubled areas when supplying more money will destroy the currency?

Michael Leister, strategist at DZ Bank in Frankfurt said that it is feeling good only because markets are very ‘complacent’ at the moment (Tracy, 2012). As a result of this rescue by ECB, the risk premiums of both the Italian and Spanish bonds have narrowed. By Wednesday’s close, the Spanish risk premium dropped to 339 points from over 354 basis points. A similar case is with the Italian bond, which has dropped below 500 basis points. This risk premium or yield spread stands at 2.

735% for Italy on 12-month bills, which is a considerable drop from 6% only one month ago in the Dec 2011 auction. But the important question is, for how long will the banks keep supporting medium and longer-term government debts. It looks as if it is only a temporary solution and it will not end the European debt crisis. One probable strategy, at least for Spain would be to cut its net debt issuance by around 25%. As the article reveals how much money Spain has risen, it will be a great challenge to achieve that mark, but comparing the debt situation of Italy and Spain, the latter looks in a better and safer credit position.