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. âWe confirm that we are buying today,â said a spokesman for Germanyâs 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 Greeceâs budget deficit. The ECB, whose resistance to buying government bonds last week exacerbated market turmoil, this morning said it will purchase assets to âensure depth and liquidity.â âThe buying today is an obvious gesture to impress investors,â said Ciaran OâHagan, a fixed-income strategist at Societe Generale SA in Paris. âAnd it requires very little cash right now to push the yields down on the riskier sovereigns.â http://www.bloomberg.com/apps/news?pid=newsarchive&sid=adZGdKgAJtio Ant it requires very little cash...
It is my understanding that regional central banks in EU are not allowed to purchase bonds by the relevant EU Treaty. What has happened? Is the Union rules and the ECB circumvented by regional central banks?
The rules have changed... And, supposedly, these purchases will be sterilized, so Axel isn't printing. Or so he says...
Regardless and besides the fact that this sounds like panic, it is money creation as debt, even temporarily. I wonder, who is making the profit from letting central banks buy bonds and then lend the money to the EU countries through commercial banks. It sounds to me like an attempt to just bolster bank balance sheets with no clear effect on the economy because the liquidity trap is on. I further see it as a manipulation of the fx market (I hold no positions currently).
It sounds like a panic, because it is a panic. It is money creation, yes, but they're supposedly going to force countries into additional fiscal tightening, which is, by the same token, money destruction. As to who makes the profit, it's just not clear at the moment, since there are no details available for the program. I think the point of the measures was precisely to remove the threat of the liquidity trap and maybe to force inter-EMU rebalancing.
Remember the euro doesn't have the benifit of the yuan peg that the dollar has. They may think they can do open market operations to support gov bonds, but the pressure will then relieve itself through a weaker euro.
Don't these countries that are forced into additional fiscal tightening actually have to tighten before it's destruction? I rank that success rate up there with the OPEC cartel's "we're all cutting supply" (and then they all don't cut supply because they want to sell more oil individually but not publicly say so). Take Greece, for instance. I'm truly interested in hearing anyone who believes that Greece will actually be successful in it's austerity programs.