ECB to cut key rate as Greece readies euro exit

Frankfurt: The European Central Bank will step up measures to tackle Europe's debt crisis in the third quarter, before a probable Greek exit from the euro area next year, Citigroup Inc. said.

"We assume that Greece will leave the European Monetary Union in early 2013," economists led by London-based Willem Buiter wrote in an investor report. "We expect governments and the ECB, with extra longer-term refinancing operations and a rate cut to 0.5 per cent in the third quarter, to put in place measures to contain the contagion."

Portugal and Ireland will require further international bailouts, the economists wrote. A programme for Spain and financial-market support for Spanish and Italian government bonds, will also be needed, they wrote.

Germany's 10-year bund yield will drop to a record 1.25 per cent in the fourth quarter, according to forecasts provided in the report. Spain's 10-year yield difference over bunds, Europe's benchmark government debt securities, will widen to 600 basis points, or 6 percentage points, in the third quarter. Italy's yield spread will reach 600 basis points by the end of the year, the forecasts show.

Record low

Germany's 10-year bond yield fell to a record-low 1.351 per cent yesterday. The yield difference between Spanish and German 10-year bonds widened seven basis points to 489 basis points.

Italy's spread over bunds widened three basis points to 432 basis points.

"We are revising down our forecasts for German bund yields and these now reflect an expectation that two-year and three- year yields will turn negative," Mark Schofield, head of interest-rate strategy in London, wrote in the note.

The bund yield will average 1.25 per cent in the fourth quarter and in the first quarter of 2013, Citigroup forecast.

The rate on the German securities will be 2.21 per cent in the fourth quarter and rise to 2.35 per cent in the first quarter, according to a weighted average of analyst estimates compiled by Bloomberg.

So-called stability bonds for the euro region or more intervention by the European Central Bank won't be a permanent solution to restore the trust of financial markets, Estonian Finance Minister Juergen Ligi said yesterday at a conference in Sopot, Poland, according to an e-mailed transcript from the finance ministry today. Countries need to address their budget deficits and excessive debts to rebuild trust, Ligi said.

Spanish Prime Minister Mariano Rajoy yesterday called on the European Central Bank to act to bring down rising borrowing costs after Spanish bond yields approached the levels that pushed Greece, Ireland and Portugal into bailouts. "If public debt isn't sustainable, we have a problem," he said after a meeting of European Union leaders in Brussels. "I insist it is up to the ECB to take this decision that it has already taken in the past."