ECB Escalating From Limited to Unlimited Bond-buying (Sep 2012)


Source: The Guardian – ECB introduces unlimited bond-buying in boldest attempt yet to end euro crisis

Notable Excerpts:

Read carefully => Distressed government bonds.

The European Central Bank (ECB) unveiled its boldest attempt yet to stabilise the battered single currency on Thursday when its president, Mario Draghi, announced a new programme of open-ended, unlimited buying of distressed government bonds.

The scheme is aimed at depressing the costs of borrowing for Spain and Italy and countering the risks of a fragmentation of the eurozone and the unravelling of the single currency.

The new bond-buying scheme, to be known as outright monetary transactions or OMTs, means that the ECB will intervene in the secondary markets to buy up the debt of governments whose bond yields are too high and are therefore jeopardising the uniform conduct of monetary policy across the eurozone, Draghi said.

The purchases would apply only to short-term debt of up to three years. The countries benefiting from the help would first need to request a eurozone bailout and governments in the single currency would need to decide to use the bailout funds to lend directly to struggling states.

For those who thinks of stimulus as a lifesaver, they applaud the action.

Draghi’s action received a glowing critical reception across Europe. Olli Rehn, the European commissioner for monetary affairs, welcomed the move; leaders of political parties in the European parliament compared Draghi’s decisiveness favourably with the perceived fecklessness and hesitation of eurozone political leaders. Britain’s Institute of Directors called the policy shift a potential “game-changer”.

For those who asked, “Where did all this bailout and debt-monetizing money came from? Who is really footing the bill?”, they questioned the action.

The tributes were more muted in Germany, however, where monetarist hawks accuse Draghi of overstepping his mandate, embarking on a policy that will fuel inflation, and illegally if surreptitiously launching a policy of financing debt-ridden countries.

It’s a joke…

Spanish and Italian 10-year borrowing costs fell to three- and five-month lows following Draghi’s announcements.

Draghi said that the interventions could be halted if they were seen to have been successful in curbing the cost of borrowing, and also suspended if the country benefiting from the help breached the terms on which it received it.

The forward cost of keeping the single currency alive…

More broadly, the Frankfurt-based central bank is also making explicitly political demands of eurozone government leaders, urging them to streamline and integrate the institutional architecture linking the 17 countries, meaning greater pooling of sovereignty and surrender of national powers in fiscal and budgetary policy.

And they are doing everything they can to keep it alive… even if it means breaking the rules.

The Bundesbank has argued that a bond-buying programme would be tantamount to direct financing of governments, which is proscribed by the ECB’s statutes.”

And so the conjuring of new Euros out of thin air continues for the purposes of financing bankrupt governments. Isn’t the Euro a shared currency of all Euro zone nations? The inflation stealth tax is now to be foot by citizens of these nations.

The initiative is the third time since the spring of 2010 that the ECB has intervened in this way, first buying up Greek debt in May that year, then mounting an unsuccessful attempt last summer to relieve the pressure on Rome by buying Italian debt.

Let’s see how this plays out further.

These two previous attempts are viewed as having done little to contain the euro crisis. This time, Draghi said, “it will actually work.””

The need to buy short-term debt is essentially trying to avoid default.

The reasons he cited were the strict terms attached to receiving assistance; the decision to forgo the ECB’s status as a senior creditor and take equal ranking with other creditors; and because the bond-buying would be restricted to short-term debt.”


2 thoughts on “ECB Escalating From Limited to Unlimited Bond-buying (Sep 2012)

  1. Pingback: Italy bond yield rises back above 7% despite ECB (Nov 2011) | livinginabubbleblog

  2. Pingback: Bank of Japan Joins Fed, ECB in Record Stimulus (Apr 2013) | livinginabubbleblog

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