Left to fight alone, the European Central Bank doubles its ammo

12/16/2010 11:05 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The euro debt crisis takes another bite at Spain and expands to Belgium. But German opposition to a bigger bailout fund has left the European Central Bank to fight the problem alone.

So, prudently, the European Central Bank has decided to raise more capital. Today, December 16, the ECB announced that it will raise its subscribed capital to 10.76 billion euros from the current 5.76 billion euros in three stages starting on December 29.

Good move--because the challenges facing the bank keep on mounting, On December 15, Moody’s Investors Service said it was considering a cut to Spain’s Aa1 credit rating. Spain lost Moody’s top credit rating in September.

On December 14 Standard & Poor’s cut its debt outlook for Belgium. That country has been ruled by a caretaker government after elections six months ago failed to deliver a majority for any party or coalition.

Meanwhile back in Berlin, German Chancellor Angela Merkel ruled out any increase in the 750 billion euro European rescue fund.

Merkel’s government has signed on to boosting the capital of the European Central Bank, however, and in fact would be the biggest single contributor. The ECB is funded by capital contributions from European Union central banks. And after intervening in the euro crisis by buying government bonds and by extending loans to European banks, the ECB’s balance sheet is looking a little stretched.

European leaders are meeting today and tomorrow in Brussels in an attempt to work out some more permanent crisis solution. But with the current situation basically requiring the ECB to throw cash at each crisis as it develops, raising more capital for the ECB is an essential step. If you’re the only lawman in town, you’d better have lots of bullets in your gun.

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