The European Central Bank, in a stunning change of position, said Sunday night it will buy government and private debt on “dysfunctional” European markets as part of a concerted show of force by European authorities to persuade financial markets that they are, in fact, responding to the spreading sovereign debt crisis in the euro zone. http://www.ecb.int/press/pr/date/2010/html/pr100510.en.html

Here’s some early reaction:

Marco Annuniziata, UniCredit Group

“Even with Portugal and Spain announcing further fiscal adjustment measures in the coming days, it will be hard not to see this as a loss of credibility and independence for the ECB. The ECB has stated that the interventions in the secondary market will be sterilized, so that the measures will not affect the stance of monetary policy. It argues that these purchases are aimed at correcting market distortions rather than easing overall monetary conditions, and stresses that they have been agreed also in light of the commitment by member states to take all necessary measures to meet their fiscal targets. Liquidity has indeed declined sharply in some of the sovereign bond markets, and ECB bond purchases at this stage can also be seen as a preventive measure: while current spreads on Portuguese and Spanish bonds currently do not look greatly out of line with fundamentals, market movements in the last few days had highlighted the risk that self-fulfilling panic might set in, and the ECB needed to be ahead of the market. In the short term, the ECB’s intervention will be a crucial element of the package, bringing immediate relief; the longer term implications however could be extremely detrimental. Much will depend on whether or not Eurozone governments quickly follow through on their pledge to accelerate fiscal consolidation efforts: if they do, the ECB might still be able to argue that it has offered temporary support to offset impending market dislocations; if they do not, it will be hard for the ECB to fight off the charge of monetizing excessive fiscal deficit. So far, however, no strengthening of fiscal discipline mechanisms has been agreed, and all we have is the commitment to enforce the procedures and sanctions of the Stability and Growth Pact—which unfortunately has a rather dismal track record.”