ECB limited and conditional lending is not ‘what it takes’

Pierro Ghezzi is one of the smartest City-based economists – he has a new VOX article here.

9 replies on “ECB limited and conditional lending is not ‘what it takes’”

To quote the conclusion.

“We are not suggesting that the current ECB plan will fail or that Italy and Spain will inevitably default if the ECB refuses to undertake unlimited and unconditional lending. Indeed, we think the plan increases the chances of eventual resolution of the crisis. We believe Spain and Italy will eventually make it and would not deny that the ECB plan will help at the margin. But if we define success in solving Europe’s debt woes as the ability of Italy and Spain to regain market confidence in the immediate future, the current ECB plan is unlikely to be successful. It is not a game changer as it does not eliminate, in our view, the material risk of failure. To that extent, and absent (an unexpected) strong rebound in European economic activity, the EFSF/ECB is likely to need to own a very large portion of the debt for a very long time. And if accidents happen and the domestic political support for further adjustment evaporates, the end game will be either default or debt mutualisation. The latter could be lite (either directly through the ECB’s unlimited and unconditional lending or indirectly through the ESM) or full-blown through Eurobonds.”

Both sides in this political struggle have to attempt to stay standing. Politicians on both sides will do their utmost to avoid political difficulties at home, Ireland being no exception.

I posted this link to the views of the Spanish economy minister on another thread.

Here the original Reuters interview.

September promises to be an interesting month.

When a gambler doubles down on a bad bet, they improve their survival odds, but the threatened day of reckoning becomes more ugly. Let’s hope the euro is a great idea despite its enormous flaws, because all these people are desperately doubling down. Neither this man, nor Draghi, dare mention the euro may be the wrong currency choice to be locked into for 17 nations.


as soon as the ESM becomes active, Draghi has no excuse anymore to use the ECB to break the Maastricht treaty. That makes him much less important, because he has little say in the ESM.

As I see it, bankrupting speculators a.k.a. “Strategic Investment Departments”, or whatever they call that at Citi, if they try to take bets against Euro countries, is part of the ESM job description.

Ghezzi, Soros, etc also like to keep their jobs / profits. Folks like mne do not forget 1992.

Soooo, for a lot of people, time is running out until September 12th to come up with something : – )

Aiming the Bazooka
ECB Plans to Set Yield Targets for Bond Purchases

Interest rates on Spanish sovereign bonds have been rising to dangerous levels in recent weeks. Now, SPIEGEL has learned that the European Central Bank plans to use a new instrument to stop the trend: The bank is considering setting yield targets on the bonds of euro-zone countries. Should interest rates exceed those levels, the ECB would intervene by buying up their debt.

As part of its efforts to fight the euro crisis, the European Central Bank (ECB) is considering establishing caps on interest rates for government bonds in individual countries as part of its future bond-buying program. Under the plan, the ECB would begin purchasing government bonds from crisis-hit countries if yields for those bonds exceeded the interest rates for benchmark German sovereign bonds by a predetermined amount. This would signal to investors which interest rate levels the ECB believes to be appropriate.

Given that it can print money itself, the central bank has access to unlimited funds, which could make it extremely difficult for speculators to continue driving yields up beyond the amount stipulated by the ECB. By engaging in bond buying, the ECB not only wants to get the financing costs of crisis-plagued countries under control — it also wants to ensure that the general interest-rate levels across the euro zone do not drift too far apart.


Interview With Volker Kauder
‘Europe is Our Future’

Volker Kauder, 62, is the head of the parliamentary group of Chancellor Angela Merkel’s conservatives. In a SPIEGEL interview, he defines his party’s red lines in the euro bailout efforts and warns against hasty changes to the constitution in response to the euro crisis.

Austrian and Finnish ministers should be wary of making rash statements on the future of the euro, writes JOHN BRUTON
Both men should read a paper by a man who actually has some direct recent experience of what happens after the breaking up of monetary unions.

He is Anders Aslund, and he worked as an adviser to the Russian government during the break-up of the rouble currency union between 1991 and 1994. The rouble had been the common currency of the former Soviet Union. Aslund’s paper is published on the website of the Washington-based Peterson Institute of International Economics.

Aslund says the result of even one country leaving the currency union would be chaotic.

I’m +1 with Aslund and have been throughout this crisis due to foundation of Solidarity Principle in the European Project

From the above in Der Spiegel Darghi may be taking the stronger route noted by Ghezzi ….. [assuming that Asmussen takes Weidemann out for a Pilsner while the vote is taken or perhaps before the vote is taken .. spose The Guv’nor might have a drop of Jameson on stand-by ….

‘Given these institutional constraints, what can the ECB do to force a good equilibrium once, as it seems now, markets have moved beyond the ‘point of no return’ in some of the peripheral countries?

In principle, the ECB can eliminate this risk by acting as lender of last resort and capping yields at a level that ensures solvency (unless things turn out badly in terms of economics or policy effort). The ‘target’ yield would need to be sufficiently low to be consistent with debt sustainability but sufficiently high to maintain the incentives to undertake domestic reforms. This would theoretically eliminate (or at least reduce massively) the risk of default and start a virtuous cycle. However, in order to be ‘successful’, the ECB would need to be credible that it is going to defend its desired target rate.

This is difficult. Clearly, the ECB has the balance sheet to buy as much debt as needed to defend the target yield it pleases. But in practice, the ECB is unlikely to commit to the magnitude of the intervention that may be required to cap yields for two reasons: a) concerns that moral hazard in policymaking could lead the weakest countries in the Eurozone to lessen their efforts to reduce deficits; b) the ECB may not be willing to accept the associated credit risk.

Instead, the strategy that the ECB is undertaking appears to be different. In conjunction with the EFSF, it is going to provide limited and conditional lending. The question is whether this type of intervention will be enough to rule out the bad equilibrium. We are sceptical that it will provide a sustainable solution in the long term for two reasons. …..

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