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BREAKING: Euro-Area Central Banks Are Buying Government Bonds
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This is guaranteed inflation isn't it? I mean, if countries can buy their own bonds, what will stop politicians from campaigning on inflated money? Money will be abundant, but of course, worthless.
Euro-Area Central Banks Are Buying Government Bonds (Update2)
May 10, 2010, 7:02 AM EDT
By Christian Vits
May 10 (Bloomberg) -- Euro-area central banks said they are buying government bonds as part of a program to counter a sovereign debt crisis and defend their common currency.
“We confirm that we are buying today,” said a spokesman for Germany’s Bundesbank in Frankfurt. The Bank of France and Bank of Italy also said they have started purchasing government bonds. The European Central Bank, which announced the unprecedented initiative at 3:15 a.m. this morning, declined to comment. President Jean-Claude Trichet will hold a press briefing in Basel later today.
The euro strengthened 2 percent and stocks climbed around the world after European policy makers unveiled a $960 billion loan plan overnight to end a crisis of confidence in the currency that was triggered by Greece’s budget deficit. The ECB, whose resistance to buying government bonds last week exacerbated market turmoil, this morning said it will purchase assets to “ensure depth and liquidity.”
“The buying today is an obvious gesture to impress investors,” said Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris. “And it requires very little cash right now to push the yields down on the riskier sovereigns.”
The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of benchmark German bonds fell from euro-era highs today. The premium on 10-year government bonds plunged to 446 basis points from as high as 965 basis points for Greece. It fell to 199 basis points from 350 for Portugal and to 97 basis points from 166 for Spain.
‘Nuclear Option’
The 16 national central banks of the euro region are acting under the umbrella of the ECB. By resorting to what some economists have called the “nuclear option,” the ECB may open itself to the charge it’s undermining its independence by helping governments plug budget holes.
The central bank said it will intervene in “those market segments which are dysfunctional,” suggesting it views the surge in some of the region’s bond yields as unjustified and that it’s acting to stabilize markets and protect the 16-nation economy.
By deciding to “go in and buy sovereign and corporate debt, they crossed a line,” said David Kotok, chairman and chief investment officer at Cumberland Advisors Inc., which manages about $1.4 billion in Vineland, New Jersey. “The line between fiscal and monetary policy gets blurred.”
Global Rout
Investors cited the ECB’s initial refusal to consider asset purchases as one reason for the May 7 rout in global markets, which included U.S. stocks falling the most in 14 months amid concern Greece’s woes were spreading.
My personal note: I think this was a hit by the banksters, once the ECB refused to bail them out, they orchestrated a "little" crash on the markets, thus forcing ECB to play along
After a week in which markets showed growing concern about access to funding, the Frankfurt-based ECB also reversed its withdrawal of emergency steps taken to tackle the global credit crisis, saying it will again offer banks as much cash as they want for terms of three and six months. It will also reactivate a swap line with the Federal Reserve and sell unlimited amounts of U.S. currency for seven and 84 days. The first operations will take place this week.
The central bank acted in concert with governments after markets targeted European economies with the weakest public finances. The extra yield that investors demand to hold Greek, Portuguese and Spanish debt instead of German bonds surged last week to the highest level since the euro’s 1999 introduction.
Sterilization
While the euro’s founding treaty bans the ECB from buying bonds directly from governments, it can do so in the secondary market. The ECB said its moves won’t affect monetary policy as the resulting liquidity will be reabsorbed. The bank’s council will decide on the scope of the intervention, it said.
“They are not cranking up the printing presses,” said James Nixon, co-chief European economist at Societe Generale SA in London. “This is a much more targeted, surgical approach. They buy the duff stuff that no one in the market will touch.”
Bundesbank President Axel Weber said on May 5 that the threat of contagion from Greece’s fiscal crisis didn’t merit “using every means.” Without referring specifically to bond buying, he said “measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term.”
Until today, Trichet had tried to convince investors that volatility in euro-region markets would subside once the Greek government drew on its 110 billion-euro aid package and implemented its agreed austerity plan. After the May 6 meeting of the ECB’s council, he urged other European governments to take “decisive” action on deficits and said Portugal and Spain were “not Greece.”
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