In case you had not seen this.

If the ECB bought Greek bonds in the secondary market and issued an ECB bond as suggested below,

that could be a reasonable solution out of this mess?

They don’t need to issue the ecb bonds unless the money markets have excess reserves driving short rates below target rates

It doesn’t solve much any more than the Fed buying Lehman bonds in the secondary market would have helped Lehman.
It just lets some bond holders get out, presumably on the offered side of the market.

That’s why it’s allowed in the first place- it does not support the member nation and introduce that moral hazard.

To keep things fair, they could state that they would buy up to a maximum of a certain amount of bonds per capita (or even the average of the last 5 years of GDP) for all EUR denominated countries on a discretionary basis.

As above.

It sort of accomplishes what you suggested but with tools already in place and most importantly with the mainstream economists actually discussing it?

I don’t think so, as above. The member nations would still be in Ponzi, where they have to sell debt to make an expanding amount of debt payments.

The ECB might even make money if Greece paid off; just like the FED did with mortgages and bank stocks.

The ‘profits’ are similar to a tax, removing net financial assets form the private sector. They made money because the Federal deficit spending was sufficient to remove enough fiscal drag to allow the private sector to return to profitability.

The Fed and Tsy profits simply somewhat reduced the deficit spending.

— Original Sender: —

From our Economics Team…..

ECB meeting preview / ECB intervention

The current market action has prompted many questions on the ECB possible interventions and what Trichet might say/announce tomorrow at the ECB press conference. I think an ECB intervention is indeed now becoming very likely. Remember that the ECB “printed” 500Bn EUR in just 2 weeks in October 2008 to fund the money market which had became dysfunctional after Lehman. The primary mandate of a central bank is to maintain financial stability; hence the Oct 2008 change in repo rule and the 500Bn of money created; de facto, the ECB made teh clearing of the money market. The same might happen for the sovereign market.

Yes, but as above, it doesn’t address solvency or credit worthiness of a member nation in Ponzi, which is all of them.

The real problem is austerity probably won’t bring down deficits, as it weakens the economies, cutting into tax revenues and adding to transfer payments.

The following is a quick summary.

*** Fundamentals:

– The problem with Greece was a problem of sustainability of public finances. Lending more was not the solution, the solution was to cut dramatically the deficit to reduce it to a level at which public finances are sustainable. Hence the need for an IMF plan, i.e. loan and more importantly an ambitious fiscal consolidation.

Except that the cutting can actually increase deficits, as explained above.

– The other countries are in a very different economic and fiscal situation, the situation is manageable (for e.g. see our weekly last Friday comparing Greece and Portugal). So the problem for the other countries is essentially a problem of market liquidity. This means ECB intervention.

If that’s all it was, fine. But seems to me they also can’t bring down deficits with austerity, but only increase them, for the reasons above.

*** ECB intervention: When?
– Probably early next week.

– Usually markets react when money is provided, not when the plan is announced. This is what happened for e.g. with the TARP. So there is a case for waiting until the IMF plan is enacted to see market reaction and design the measures accordingly.

Agreed. And the IMF plan requires the member nations to buy SDR’s with ‘borrowed money’ to fund the IMF loans, so there is no help from the IMF balance sheet regarding credit worthiness.

No matter how they slice it, without the ECB doing the lending, any package for Greece diminishes the other member nation’s credit worthiness

– The German Parliament votes Friday. It is probably not desirable from the ECB perspective to act before.

They don’t have popular support as seems German’s don’t want to pay for Greek public employees salaries and benefits which are higher than their own.

*** ECB intervention: How?

There are probably an infinite number of intervention mechanisms available. The following bullet points list the most obvious ones. These bullet points are based on the note published Monday “Greece after the IMF plan”.

– The ECB could deploy its balance sheet, initiating expansionary liquidity provisioning. This would be pure QE with the ECB buying directly governments bonds. Note that this is not against the status of the ECB: the ECB (or any central bank of the Eurosystem) cannot “finance a public deficit” hence cannot buy on the primary market, but there is no limits on the secondary market.

This is allowed for a good reason- it doesn’t do much, as described above.

Note also that the intervention can be sterilized, the ECB has the possibility (although it never used it so far) to issue a bond, it could thus issue an ECB bond of the same size as its intervention on the market; having then a zero effect on the net liquidity provided. We though QE was unlikely given past ECB policy, but under the current circumstances it would definitely be a possible option.

‘Liquidity’ only matters if it drives the overnight rate below ecb target rates. They can then ‘offset operating factors’ as they call it as needed to keep the interbank rate on target.

This is purely technical and of no monetary or economic consequence.

– In theory, the ECB could deploy reserves under management, about €350Bn, to buy bonds of the country at-risk. Here, however, we doubt the ECB would respond in this fashion. The fund would be limited and it would imply that a disproportionate part of the reserves would be invested in the “trouble” countries.

Operationally they can readily buy anything they want.

– Rather, most ECB policy intervention is channeled through banks. Various options are available to the ECB, including adjusting repo rules or collateral rules on existing sovereign paper. One option would be to accept the paper at par instead of accepting it at market value. This would mean that a bank could buy a sovereign paper at 70cents and repo it at 100cents.

Yes, but still full recourse- the bank remains on the hook if the collateral goes bad, and it has to report its net capital accordingly- recognizing full ownership of the collateral.

Another option would be to argue current market failure and, as a consequence, repo at the average price of the past year (same logic, note that this option has been used for e.g. by the SFEF in the financing of French banks). The ECB could also accept as collateral banks loans to governments.

Bank liquidity is not an issue. The price of the repo is of no consequence until bank liquidity is an issue.

– Financing could even be channeled via supranational institutions. In that case the intervention would not need to need to be made public.

*** ECB press conference tomorrow: what will Trichet say?

– Difficult to preannounce the measures and give details even if ECB is planning an intervention.

– Impossible to say nothing about the current situation.

– Trichet is likely to say “we have the tools to intervene and will not hesitate to do so”.


This is unlikely to calm the market much.


The question is, does he care? The ECB still has the single mandate of price stability.

Technically they would intervene to stop deflation, or something like that.

But with higher prices pouring in through the fx window that’s now problematic as well.

Warren Mosler

UTFITF (unheard tree falling in the forest)

2 Responses

  1. “It doesn’t solve much any more than the Fed buying Lehman bonds in the secondary market would have helped Lehman.”

    Wouldn’t the ECB buying Greek bonds bring down yield on those bonds, which in turn would allow Greece to refinance without any help from the EU/IMF?

    1. Yes, I believe you’re right. I’m not sure why Warren doesn’t recognize the fact that buying in the secondary market is simply an inefficient form of buying in the primary market (it allows financial intermediaries to earn a bid/offer spread). Secondary market buying would aid Greece by facilitating new bond issuance at a lower interest rate. If the ECB is allowed by law to do this, it certainly seems like a large loophole it could exploit to save Greece in the short-term.

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