World stock markets tumbled again this evening, after actions announced by the European Central Bank failed to calm fears about the euro zone debt crisis.
Speaking after the bank left its main interest rate unchanged at 1.5%, bank president Jean-Claude Trichet signalled that the ECB was buying euro zone government bonds in the markets this afternoon. This was later confirmed by market sources, but it appeared that the ECB was not buying Italian and Spanish bonds.
Borrowing costs for Italy and Spain rose again, with the interest rate on Spanish 10-year bonds at 6.33% and Italy's climbing to 6.25%. Spain, which had earlier managed to raise €3.3 billion in a bond auction, this evening announced that it was cancelling a bond auction planned for August 18.
Stock markets in London, Frankfurt and Paris closed down more than 3% this evening, while Milan dropped by more than 5%. Wall Street also fell sharply.
The European Central Bank also announced a fresh six-month loan operation, providing under-pressure banks with easier funding, due to tensions in euro zone money markets.
The ECB had previously ended six-month loan operations, which were one of the exceptional measures taken during the global financial crisis to ensure that the banking system had enough liquidity.
'The governing council today decided to conduct a liquidity providing supplementary longer term refinancing operation (LTRO) with a maturity of approximately six months,' ECB President Jean-Claude Trichet told reporters in Frankfurt. He was speaking after the bank kept its main lending rate unchanged at 1.5%.
The euro zone debt crisis has put Italy and Spain under huge pressure in recent weeks after Greece, Ireland and Portugal had to be bailed out by the EU and International Monetary Fund.
The banks, who hold large amounts of government bonds issued by these weaker euro zone countries, have in turn come under pressure, finding it more difficult and increasingly costly to raise fresh funds from the markets.
Mr Trichet also said the bank would continue to 'monitor very closely' inflation risks in the euro zone.
He had used the same 'monitor very closely' phrase last month when the bank raised rates to 1.5%. It is usually seen as signalling that another interest rate rise is likely at some point, but not in the short-term.
The ECB has raised rates twice this year in an effort to combat euro zone inflation, which eased to 2.5% in July.
Mr Trichet also said recent figures had shown a slowing in the pace of economic growth, and there was particularly high uncertainty about the outlook.
