>   (email exchange)
>   ”To sterilize the bond purchases, the ECB will remove from the system elsewhere the same
>   amount of money it spends, ensuring the program has a neutral impact on the money
>   supply.”
>   blimey…

ECB Plan Said to Pledge Unlimited, Sterilized Bond-Buying

25 Responses

      1. @Neil Wilson,

        Target2 balances can increase without limit.

        But the PIIGS’ governments are so innefective that they won’t even use them to restore their monetary sovereignty.

      2. @Jose Guilherme,

        Only to the extent that somebody else’s is going down – if the ECB isn’t accommodating.

        You could ‘neutralise’ the movement of some of them by offering a term deposit account at the ECB, the proceeds of which buy the equivalent term government bond from the periphery.

        Essentially then the ECB takes on the default risk.

      3. @Jose Guilherme,

        @ Neil Wilson

        A PIIGS’ bond is maturing today, held by – say – Deutsche Bank.

        The PIIGS’ government sells a new bond to a government-owned commercial bank.

        Uses the deposit to pay off the German bank.

        At the end of the day, the Bundesbank will have a positive balance versus the ESCB while the PIIGS’ NCB will have a corresponding negative balance. Under TARGET2 there are are no limits to said balances.

        Repeat the process tomorrow and after tomorrow on and on – PIIGS monetary sovereignty has been restored!

        A pity that none of them dares to use this escape clause provided by the eurosystem, courtesy of TARGET2.

      4. @Jose Guilherme,

        They’ve been doing that effectively with the private commercial banks in the periphery.

        And AFAICT it only works to the extent that the ECB is prepared to allow Emergency Loan Assistance (ELA) to the national central bank

      5. @Jose Guilherme,

        @ Neil Wilson

        The ECB has to allow the necessary leeway to the NCB, with or without ELA. Otherwise, the payments system of the eurozone will collapse.

        Therein lies the beauty of TARGET2.

        A beauty, alas, the PIIGS have proved unable to capture.

      6. @Jose Guilherme,

        @ Neil Wilson

        Also, doing it via private banks is very different from using the government-owned banks for the purpose.

        The government bank has to follow orders from its shareholder. That means monetary sovereignty has returned through the back door.

    1. @Joshua Wojnilower,

      Meanwhile, in a parallel universe, the fed dangles prospects of QE3 to excite market participants while simultaneously conducting “small scale” drain operations. Must be some sort of coordinated inaction.


      NY Fed: Will Conduct Series of Small Reverse Repos Starting Thursday

      Wed Sep 05 10:37:23 2012 EDT

      NEW YORK–The Federal Reserve Bank of New York said Wednesday that it will
      again implement another series of “small scale” reserve draining operations
      starting Thursday.

      The reverse repurchase agreements, which take reserves from the banking
      system, are part of “prudent advance planning” by the central bank, the New
      York Fed said. “These operations do not represent a change in the stance of
      monetary policy, and no inference should be drawn about the timing of any
      change in the stance of monetary policy in the future,” the bank said.

      The reverse repo will use all eligible collateral types. In implementing the
      reverse repos, the New York Fed is planning for the day when it will eventually
      work to tighten monetary policy. Most central bankers and private sector
      economists believe that time lies well off in the future.

      Write to Michael S. Derby at michael.derby@dowjones.com

      (END) Dow Jones Newswires

      September 05, 2012 10:37 ET (14:37 GMT)

      1. @Ed Rombach,

        “coordinated inaction” – classic, Ed;

        there’s a reason why constructively coordinated actions always outweigh inaction, even if coordinated;

        is it the same reason matter seems to predeminate over antimatter? 🙂

  1. does this “sterilization” square with your recent comments that there does seem to sufficient deficit spending to maintain the various euro economies?

    1. sterilization is meaningless.
      but I do continue to think they will ‘do what it takes’ to the best of their abilities, however questionable.
      and looks like deficits may be high enough for stability if they don’t increase the austerity.
      July and August numbers so far possibly indicating things are either stabilizing or not getting worse at faster rates, but still too early to tell.

      1. @WARREN MOSLER,

        They’ll do what it takes, no doubt.

        But in return the periphery will have to submit to ECB-dictated austerity – forever.

        Failure to comply will mean the suspension of bond-buying and a consequent rise in yields. This means non-compliance won’t be an option.

        The dream of European unity will thus be achieved not at the point of a gun, as in the distant past, but of a computet keyboard.

        Less heroic but much more effective.

    1. @okl, corrected link is

      ps: this comment is flat out wrong;

      “governments must therefore use much more vigorously the policy levers they still control to support strong, sustainable and balanced growth at the global level”

      The duty of each government is to further improve the general welfare of their own people. That’s why there are separate governments. If any one of them develops significantly better methods …. the other countries will eventually emulate the successful ones, or be replaced.

  2. back to IMF helping to monitor ECB-member state finances

    This is insane – just political cover.

    All this shows is that ECB-member states don’t trust one another. What makes ’em think the IMF is a neutral party? Or even a competent one? OR that electorates will be either satisfied, or impressed.

    “Countries that want the ECB to buy their bonds must first officially ask for help from Europe’s bailout funds and agree to “strict and effective” budget policy conditions.
    The International Monetary Fund will help monitor the compliance by governments to those conditions.”


    Do we let the IMF monitor Mississippi’s fiscal operations? Don’t answer that. We actually might, behind the scenes.

    Bigger question. Does the IMF – in effect – look to the public like a wholly owned subsidiary of Wall St., Inc.?

  3. Can someone explain this? If they are buying bonds with new money, what are they selling to contract the money supply and to whom?

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