Markets pin hopes on ECB to ease Europe debt crisis

By Sakari Suoninen and Kevin Plumberg

FRANKFURT/HONG KONG | Thu Dec 2, 2010 1:36am EST

FRANKFURT/HONG KONG (Reuters) - The European Central Bank is under pressure to act on Thursday to help the euro zone contain a crippling debt crisis that has stoked contagion fears in the United States and Asia.

Hopes that the ECB will rush through new anti-crisis measures, such as expanding its government bond buying, helped the euro stabilize and lifted stock markets.

But the central bank risks disappointing markets if, as several analysts predict, it will only decide at its monthly meeting that its liquidity taps for euro zone banks will stay wide open and merely hint at more government bond purchases.

"The price action ... adds to risk that the market may be disappointed with today's outcome," Citigroup currency and markets strategists said in a note.

Even European powerhouse Germany struggled to sell its bonds on Wednesday and Portugal's borrowing costs soared in further signs that last weekend's 85 billion-euro ($110.7-billion) EU-IMF rescue of Ireland and leaders' pledges to defend the euro at any cost failed to impress investors.

European Union leaders appeared to pass the baton to the ECB.

Economic and Monetary Affairs Commissioner Olli Rehn said recent EU actions provided a sound basis for further stabilization steps by the central bank, and European Commission President Jose Manuel Barroso said he was confident the ECB would do whatever was needed.

"I'm sure the ECB is analyzing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone," he said.

Markets are now waiting to see how ECB President Jean-Claude Trichet will respond when he addresses the press at 1330 GMT on Thursday. Those most bullish expect to hear that the ECB will ramp up its government bond buying program, launched in May after Greece was bailed out.

HINTS

But many market watchers expect no more than hints in that direction, saying it is too soon for any conclusive announcement given a fierce debate within the ECB about the merits of such action.

Influential Bundesbank head Axel Weber has called for the program to be scrapped, and fellow ECB members have criticized the U.S. Federal Reserve's decision to buy $600 billion of U.S. debt.

"Thursday's meeting could send the first signal that ECB is on course for stepping up its purchase program," RBS economist Jacques Cailloux said in a note to investors.

Yet ECB policymakers may feel under pressure to act faster, given growing concerns that the crisis could spread beyond Europe.

In Washington, the White House said President Barack Obama was briefed regularly on developments in Europe, while a senior Treasury official was heading to Berlin for talks on the economic situation after meetings on Wednesday in Madrid.