September 6, 2012
So it continues.
During a highly anticipated press conference, ECB head Mario Draghi – the man tasked with saving the universe after eurozone leader’s consistent failures – announced today that the ECB will buy ‘unlimited’ government debt, albeit short-term.
So the central bank that once wouldn’t touch government debt with a bargepole, has now said it’s willing to underwrite governments, in theory indefinitely. In fairness, we’re talking short-term, sterilised bonds from countries who enter an EFSF/ESM bailout programme – so there are several catches. Still, this is a big move, which is why markets have reacted positively.
How long it’ll last is, as ever, an open question. You can read our full take on the decision (and all the technical details) here. The key concerns / questions:
• Purchases of short term debt don’t tackle the rising cost for Spain and Italy of refinancing long-term debt, and may force countries to focus more short term funding, making them more susceptible to higher borrowing costs.
• Despite all the talk of conditionality, can the ECB really cut off bond purchases from a country when it is already in trouble? We doubt it, at least not without causing huge problems in the markets (which the policy is meant to avoid).
• The sterilisation (removal of the money created) is almost irrelevant given the already unlimited lending provided by the ECB.
• Although it claims to no longer be senior to other bondholders, would the ECB really take losses, meaning that it crosses the mark for directly financing governments, if push came to shove?
• With the interbank lending market still dead and buried will a few sovereign bond purchases really restore monetary policy to ‘normality’?
• These purchases tackle a symptom not a cause of the crisis, lack of competitiveness, poor growth prospects, unsustainable debt and undercapitalised banks still weigh down the struggling countries.
The markets might be buoyed, but this one will drag on for much longer.Open Europe blog team