Some respite for European markets

Well I spoke too soon. The European Central Bank's (ECB) evasive action may not have impressed Asian investors, but in Europe it has reduced some of the acute stress afflicting markets.

Spanish and Italian bond prices have risen, and the implicit borrowing costs of the two governments have fallen - though to levels that are still high by recent standards.

That is what last night's ECB statement, which implies the central bank would start buying Italian and Spanish government debt, was designed to achieve.

It would have been utterly disastrous if there had been any other outcome.

Because - for the avoidance of any doubt - the ECB is taking a substantial reputational and financial risk in buying the debt of these nations: many will see the ECB as taking a serious credit risk in bailing out two financially over-stretched governments and as behaving contrary to the rules of prudent central banking.

But, for now, investors and creditors care most that someone - anyone - is buying Spanish and Italian government debt. And they're not desperately worried by the long-term risk that confidence in the intrinsic value of the European currency could be undermined by the conversion of government debt shunned by commercial investors into cash.

There has been a positive knock-on to shares in Spain and Italy, which have risen. The increase in government debt prices should help to make it easier and cheaper for Italian and Spanish banks to borrow - and also to lend, thus reducing the threat that their economies will slump

In volatile trading, UK shares opened lower, then rose, then dropped back. As for now, the trend is difficult to discern.

The attention of investors will now shift to the US Federal Reserve, and whether it will start buying US debt in a third phase of quantitative easing, to address concerns that America is slipping back into recession.

But as I have bored you by saying countless times, all this debt buying by central banks would be seen by investors and lenders not as a fundamental solution to the economic fragility of the US and the eurozone, but as simply creating the time and space for governments to address the fundamental problem of a record debt burden (household, government, financial and business debt) bearing down on their respective economies.