ECB must buy ‘hundred of billions’ of bonds to tame Europe’s debt crisis

June 21, 2010 by · Leave a Comment
Filed under: Global News 

This situation in the EU is starting to get pretty dire with interest rates on more Euro Zone country bonds rising much higher than the flagship German economy.  In the article the European Central Bank said that this purchase operations would be a sterilized program.  This means that these operations should not impact the money supply by increasing it.

If you look at how they are going to implement the program, this is flat out not true.  They plan on purchasing the bonds outright from investors and governments alike.  When you purchase these bonds, they are giving cash or equivalent  in exchange.  This money can be spent at that point on any number of endeavors.  That does not meet the criteria of sterilized.  Even if they just create the credits now to purchase those bonds, in the future you are creating inflation when those bonds come due and you either need to pay them off or create even more bonds (debt obligations) and roll over the debt.  There is only 3 options with any debt, pay off, default or refinance.  All these programs created always fall under one of three of these.

I am very eager to see the EU’s plan to prevent a double-dip recession in July.

Telegraph – The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU’s `shock and awe’ package, known as the European Financial Stability Facility. Total purchases so far have been €47bn (£39bn).

It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer.

ECB council member Jose Manuel Gonzalez-Paramo said it was “not entirely correct” to assume that the ECB was the sole buyer of the debt. “We will continue buying bonds until the situation has stabilized,” he said.

The Bundesbank is reportedly irked that French banks have led the rush to the exits while German banks have stuck by a gentleman’s agreement to keep their Greek assets. The ECB’s council insists that it has “sterilized” all purchases, offering no net stimulus. In effect, the ECB has done little to offset severe fiscal tightening by some eurozone states, and as the M3 money supply contracts.

“The ECB commitment seems half-hearted,” said Andrew Balls, head of PIMCO’s team in Europe. “The European sovereign problem has started to contaminate the European banking sector and the global economy.”

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