By Associated Press Writer, Associated Press Writer
updated 5/10/2010 9:31:46 AM ET 2010-05-10T13:31:46

BASEL, Switzerland — European Central Bank president Jean-Claude Trichet rejected suggestions Monday that the bank's decision to buy government bonds compromised its legal independence from eurozone governments, saying the shared currency's chief monetary authority remained "fiercely and totally independent."

The decision to purchase bonds — called for by economists for weeks — did much to calm markets jittery about the continent's debt crisis, twinned with a nearly $1 trillion rescue loan program from the European Union and the International Monetary Fund.

Stocks and the euro rose and spreads between riskier countries and benchmark Germany narrowed, signs markets were relieved that the debt crisis in Greece was not about to immediately engulf other European countries.

But the decision to buy bonds raised questions about whether the bank, which is independent by treaty, had yielded to urgings from politicians. The purchases supported bonds, cut borrowing costs for countries, and supports banks that hold the bonds — but it also deploys bank resources to bail out countries that spent themselves into trouble.

The central bank for the 16 countries that use the euro said it would buy government and private bonds "to ensure depth and liquidity in those market segments which are dysfunctional."

"I confirm that it has started this morning," ECB President Jean-Claude Trichet told reporters after a meeting of key central bankers in the Swiss city of Basel. He declined to provide details on precisely which bonds the ECB is buying and the amounts.

He rejected suggestions that the bank caved to political pressure.

"We are fiercely and totally independent," said Trichet, adding that "this decision is the decision of the governing council and not the result of any kind of pressure of any sort."

The ECB's policy goals of stabilizing the euro and preventing runaway inflation remained, he said.

Analysts described the ECB's move as a "nuclear option" intended to reassure markets that the bank won't allow Greece's debt problems to spread to Portugal, Spain and Italy.

Some said it was a climbdown for Trichet, who at a press conference Thursday said the bank's governing council had not even discussed bond purchases at its meeting, though he did not rule out extraordinary measures later. "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," said Marco Annunziata, chief economist at UniCredit Group.

Others raised the question of moral hazard — the idea that offering bailouts just encourages more reckless behavior.

"From a longer-term viewpoint, the purchase of government bonds by the ECB would definitely be a transgression," said Commerzbank economist Michael Schubert. "There are strong incentives for careless management of finances as long as other countries can be expected to provide a bailout."

Schubert said that the purchases increase the supply of money — an inflationary move, long term — unless steps are taken to balance them off, known as sterlization. The ECB says it will do that, but that may not solve the problem, he said.

"The mere expectation of the ECB being willing to take this course could unleash inflation expectations, even if the bank sterilises its purchases," Schubert said. "The result would be higher yields and a weaker euro."

Eurozone countries' national central banks, part of the European system of central banks under the ECB, already were buying the bonds Monday — among them those of Germany, Italy and Finland.

Trichet declined to specify the amount of bonds the ECB will buy, but said it was also taking measures to prevent the inflation that can occur when billions are pumped into the markets.

Trichet said inflation remains a risk to the global economy, but recent data including from the Eurozone was "positive."

Speaking as the chairman of the Banks for International Settlement's global economy committee, Trichet said a "global recovery is not only confirmed but has some elements at a global level of acceleration."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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