The euro will collapse as a currency unless lawmakers, and especially Germany, can agree a common European tax regime and restructure some sovereign debt, a leading market analyst told CNBC.com after the European Central Bank intervened in the markets.
Justin Urquhart Stewart, director and co-founder of Severn Investment Management, said European leaders urgently needed to address the sovereign debt crisis and take decisive action in order to prevent further contagion.
“It’s not good enough, they [the ECB] will have to do better, they are still in a state of denial. They are going to have to move to full announcements,” he said.
“They need to stop buying dodgy old debt because it is just a charade. They need to replace bad debt with good debt, the same as they did in South America with the Brady bonds.”
“So they need to replace they current system with, let’s call them, 'Trichet bonds,' which are backed by the Germans, who don’t want to do it, but will who will have to do it if they want the euro to survive,” he added. “Otherwise we are looking at the death of the euro, at least in its current form.”
The ECB bought Irish and Portuguese sovereign bonds in the markets and announced a new, six-month liquidity operation on Thursday, but the move did little to calm jittery markets as investors continue to fret about the size of the debt problem.
Traders quoted by Reuters said the central bank was buying the bonds in the secondary market just after the central banks' president Jean-Claude Trichet told the monthly ECB press conference: "I would not be surprised if by the end of this teleconference you will see something on the market."
ECB in Crisis Mode?
Some analysts said that the return to non-orthodox measures showed the central bank was in crisis mode.
"The re-opening of the six-month facility was a surprise," Gudrun Egger, euro zone analyst at Erste Bank, told CNBC.com.
The central bank had phased out 12 and six-month liquidity facilities, keeping only the three-month ones, and coming back on this decision shows that "there is some kind of tension or concern," Egger added.
"Stock markets are down, safe-havens are bought… there is no real functioning of the market, uncertainty is really high," she said.
Manoj Ladwa, senior trader at ETX Capital, told CNBC.com the ECB's was unlikely to assuage market fears as it was not bold enough.
"Up until a couple of months ago there were tightening rates now they are looking at restarting bond purchases, which I suppose will be supportive of the euro zone but given what’s going on with Italy and Spain may not be enough," Ladwa said. "It's going to be a sort term sticking plaster," he added.
The ECB appeared to have drawn a distinction between Portugal and Ireland on the one hand and Greece on the other hand, "and at the same, to indicate that they’re not going to do anything on Italy and Spain for the time being unless their hands are being forced politically," Marc Ostwald, strategist at Monument Securities, told CNBC.com.
Meanwhile, Thanos Vamvakidis, head of European G10 FX Strategy at Bank of America Merrill Lynch Global Research, said markets had been expecting the ECB to intervene and buy Italian and Spanish bonds.
“Even if the ECB were go ahead with it, it will only have a temporary impact And it would send the wrong message to the markets," he added.
ECB President Jean-Claude Trichet refused to comment when asked in his monthly news conference why the bank was not buying Italian and Spanish debt but he told CNBC in an interview later that he considered the euro zone as a whole in better shape than the US and Japan and that the bank's job was to fight inflation.
- Antonia Oprita, CNBC.com and EeSing Wong, CNBC, contributed to this story