Yes, as discussed, looks like the ECB continues to facilitate funding by continuing the same bond purchase strategy, along with dictating terms and conditions.

For the member nations, compliance means continued funding.

Continued funding + compliance with deflationary austerity measures + no ECB buying of fx = euro strong enough to work to keep net exports from increasing.

And the possibility that the ECB decides to change course remains evidenced by the steep yield curves of member nations.

Trichet hints at bond purchase rethink

By Ralph Atkins in Frankfurt and Richard Milne and David Oakley in London

Published: November 30 2010 18:52 | Last updated: November 30 2010 18:52

Jean-Claude Trichet, European Central Bank president, has left open the possibility of the bank significantly expanding its government bond purchases and warned markets not to underestimate Europe’s determination to resolve the escalating eurozone crisis.

The hint that the ECB could recalibrate its response to the unfolding crisis came as the premiums that Italy and Spain pay over Germany benchmark interest rates hit fresh highs since the launch of the euro. The euro’s monetary guardian had already stepped up purchases of Portuguese bonds, traders reported.

Nov-30

The ECB’s bond purchase programme has been controversial within its governing council since its launch in May, with Axel Weber, president of Germany’s Bundesbank, voicing his opposition publicly.

But the pace at which the crisis has spread has altered the debate within the ECB, which could justify stepping up its intervention by arguing governments’ borrowing costs were far out of line with fundamentals, signalling dysfunctioning markets.

Speaking in the European parliament on Tuesday, Mr Trichet would not comment “at this stage” on the bond programme “in the light of the current situation”. But the programme was “on-going” and decisions on its future would be taken by the 22-strong governing council, which next meets on Thursday. He also refused to rule out the possibility of eurozone governments issuing joint bonds, although the ECB was not endorsing such a step.

Since May, the ECB has spent just €67bn under its bond purchase programme. Financial markets, however, see the ECB increasingly as the only institution with pockets deep enough pockets to ease the crisis.

The ECB thinks financial markets are badly mis-pricing risk. Mr Trichet said that “pundits are under-estimating the determination of governments”. Eurozone growth was proving surprisingly strong, and Ireland’s bail-out at the weekend had shown the EU was capable of responding to crisis. “I don’t think that financial stability in the eurozone, given what I know, could really be called into question,” he said.

Willem Buiter, chief economist at Citi, said: “The involvement of the ECB is likely to rise, despite its statements – and probably wishes – to the contrary.” He argued recently that the ECB backed by governments could give the new European bail-out fund a €2,000bn loan.

Gary Jenkins, head of fixed income at Evolution Securities, argued the ECB could try “real quantitative easing” through purchases of €1,000bn-€2,000bn of bonds. “It might be politically unpalatable. But it would be an immediate way of creating a firebreak.”

Mr Trichet has insisted repeatedly that the ECB is not engaged in “quantitative easing” as it has withdrawn liquidity from the financial system equal to the amounts it has spent on bonds, neutralizing any inflationary risks. That policy would almost certainly continue under an expanded scheme.

15 Responses

  1. best laughs I’ve had all week!

    Trichet “warned markets not to underestimate Europe’s determination”

    lol! exactly whose determination is he talking about? German bankers are obviously not as happy as they think they could be.

    “possibility of eurozone governments issuing joint bonds”

    Just when you think they couldn’t be dumber! Factionalism would surely kill the EMU – back to colonialism.

    “The ECB thinks financial markets are badly mis-pricing risk.”

    Best line of the day! This guy should be on comedy classic! He could play Don Quixote’s younger, smarter brother. [Or the role of God!]

    “I don’t think that financial stability in the eurozone, given what I know, could really be called into question”

    ?? he didn’t notice that it’s stability has been called into question every week of the last year?

    “the ECB backed by governments could give the new European bail-out fund a €2,000bn loan”

    The lines just keep coming. I’ve never before seen Monopoly players create their own bailout fund, and then ask for a loan from the bank, and then ask the bank to create extra money to loan to “their” fund. People always get bored & tired & go to bed early.

    “real quantitative easing” vs not engaged in “quantitative easing”

    It’s a mad, mad world when bankers spend serious time arguing over whether or not to employ non-events in real fashion, or not at all. Are they all descended from Lewis Carroll?

    1. “But when the Fed announces its bond purchases, the whole world crushes the dollar.”

      No wonder Trichet is jealous. What does he have to do to make the ECB (and his office) as important as the FED? 🙂

  2. Well,looks like the ECB is wising up. Yet how can these statements from the EEU engender confidence? Basically admitting that the ECB runs Europe?

    http://www.reuters.com/article/idUSBRU01118420101201

    European Commission President Jose Manuel Barroso said on Wednesday he had every confidence in the European Central Bank and was sure it would take whatever action is needed to protect euro zone stability.
    “I am sure the ECB is analysing the current situation and that it will take the decisions necessary to guarantee the financial stability of the euro zone,” Barroso said after attending a meeting in Brussels.

    “The European Central Bank will take its decisions in all independence, as it has always done,” he added.

    There is widespread speculation in financial markets that the ECB could soon announce, possibly as early as Thursday, a vastly stepped up programme to buy euro zone sovereign debt to stabilise the spreading debt crisis.

    Some financial market analysts have suggested the ECB would have to buy anywhere between 1-2 trillion euros worth of debt to safeguard borrowing for all those euro zone states under pressure, including Portugal, Spain, Italy and Belgium.

    1. Anyone else reminded of “Mad Max Beyond Thunderdome”, with the midget standing on the giant’s shoulders forcing Tina Turner to admit that “He runs Bartertown”?

      Just me? Ok.

  3. The last para of the above article says the ECB “has withdrawn liquidity from the financial system equal to the amounts it has spent on bonds…”. This “withdrawal” consists of demanding deposits from banks, according to a Reuters report.

    If these deposits are money created out of thin air by banks, there is no deflationary effect. And if the money is monetary base, there is, again, no deflationary effect because commercial banks do not need reserves to make loans.

    So is this all a smoke and mirrors exercise designed to keep deficit terrorists happy? Or have I got completely the wrong end of the stick?

    1. right, if you look at the cb accounts, all they do, functionally, is act as a quasi ‘broker’ as when they lend to one bank another bank has excess balances at that cb

  4. “Mr Trichet has insisted repeatedly that the ECB is not engaged in “quantitative easing” as it has withdrawn liquidity from the financial system equal to the amounts it has spent on bonds, neutralizing any inflationary risks. That policy would almost certainly continue under an expanded scheme.”

    ECB withdraws liquidity by selling term deposits to commercial banks, they are one week securities almost, very close to bank reserves any way. ECB really cannot withdraw liquidity. It’s a political statement for those who consider bank reserves inflationary.

  5. Warren is right.

    The whole point is for the ECB to avoid quantitative easing with the sterilization and not a concern with inflation.

    1. what the ecb is doing is operationally the same as quantitative easing by the fed, except the ecb is buying member debt, while the fed is buying tsy secs.

      if the fed bought state debt it would be functionally identical to what the ecb is doing.

      1. Which would be functionally identical to the FED circumventing the Treasury.

        So the ECB DOES effectively run the EMU bloc?

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