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Review our cookies information for more details This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. Review our cookies information for more details Free exchange Economics * Previous * Next * Latest Free exchange * Latest from all our blogs The ECB's new bond purchase programme Not too little, possibly too late Sep 6th 2012, 15:23 by G.I. | WASHINGTON * * Tweet SINCE the euro crisis erupted, the European Central Bank has been torn between its legal and philosophical aversion to financing governments and its duty as lender of last resort. Today, it appears to have reconciled the two, erring on the side of the latter. At the end of its governing council meeting today, the ECB announced the much-anticipated details of how it would resume intervening in the region’s government bond markets. Using its newly christened Outright Monetary Transactions (OMT), it will buy sovereign bonds of one- to three-year maturity, provided the issuing country has agreed to a fiscal adjustment programme with either the European Financial Stability Facility, or its successor, the European Stability Mechanism. Mario Draghi, the ECB president justified the programme as a necessary adjunct to monetary policy, because the ECB’s ability to set interest rates for the euro zone as a whole has broken down over fears that some countries may leave the single currency. He never used the words "lender of last resort", a role the ECB readily accepts for banks but not for governments. Nonetheless, that is the de facto purpose. The purchases will act as “an effective back stop to remove tail risks from the euro area,” Mr Draghi told reporters. “Bond markets are distorted ... in all directions.” The new purchases will restore “monetary policy transmission and recreate the singleness of the monetary area.” The broad outlines were as expected, and the underlying details were reassuring. First, the ECB laid out two ways countries' bonds would qualify for ECB buying: if the country enters a full macroeconomic adjustment programme, as Portugal, Greece and Ireland have; or a less stringent “precautionary programme,” essentially a line of credit to countries with sound policies experiencing temporary shocks. This is important: the latter offers Spain and Italy a less treacherous way to access the ECB’s balance sheet. As Mohamed El-Erian of Pimco has observed, entry into a full adjustment programme signals the end of access to private capital markets. That creates an enormous incentive to wait until it’s almost too late. Second, the ECB made clear OMT purchases were, theoretically, unlimited, ie they have no “ex ante quantitative limits". Mr Draghi said they would end when the goals are achieved or the recipient countries stop complying with their conditions. The ECB had always insisted purchases under its previous Securities Market Programme, (SMP) were temporary. The effect on yields was thus fleeting; investors could not be sure that Europe could or would commit the money necessary to meet the potentially enormous financing needs of every country at risk. Since the ECB can simply print the money it uses to buy bonds, its resources are theoretically unlimited. (It will "sterilize" the impact of its bond purchases on the money supply, but that should pose no constraint on how much it buys.) Third, the ECB will not insist on senior credit status; it will rank “pari passu” with other holders of the same bonds, meaning in the event of a default it will not insist on being paid in full ahead of others. Without that proviso, official intervention threatened to accelerate the flight of private capital. Mr Draghi noted, however, that this did not apply to the bonds previously purchased under the SMP. The one major omission was detailed criteria under which the ECB would intervene. There will be no explicit cap on yields or spreads. Mr Draghi said the ECB will examine a variety of indicators, including yield levels, yield spreads, credit default swaps, liquidity conditions, and volatility. This is good enough, for now. Yields on Spain’s 10-year government bonds dropped to 6.09% from 6.41% on Wednesday; on Italy's, to 5.36% from 5.51%. Stockmarkets rallied. Neither Italy nor Spain have yet said they would seek aid, preferring to await the details of the ECB's programme. Barclays said it expects Spain to sign a memorandum of understanding with the European finance ministers in early October, while Ireland could actually qualify even sooner, assuming it regains access to the bond market. I suspect, however, that in coming weeks, the limitations of what the ECB has done will set in. Mr Draghi has probably succeeded in taking a full blown crisis in Italy or Spain off the table, but not in restoring financial conditions that will get the region growing briskly again. Today Eurostat said GDP in the euro area fell 0.2% in the second quarter from the first, and 0.5% from a year earlier, confirming the region is in recession. Weak purchasing managers’ indices for August suggest the recession has persisted into the third quarter. Today, the ECB sharply downgraded its growth projection for the region, to between -0.6% and -0.2% for 2012 and between -0.4% and 1.4% for 2013. This is due in great part to the credit crunch now enveloping so many countries. ECB data published on September 3rd showed a sharp rise in borrowing rates for companies and households in Italy and Spain, and a sharp drop in Germany, where, Barclays notes, rates on home loans are now at a record low. This is not just due to banks' higher borrowing costs, but because of an outflow of deposits which is squeezing lending capacity; loan volumes are contracting. In Spain, private capital equal to a staggering 50% of GDP flowed out in the second quarter, according to Nomura. Some, but not all, of this will be ameliorated by the ECB’s actions. JP Morgan reckons two-year yields would be 2% in Italy instead of 2.9% without convertibility risk, and 1.7% in Spain instead of 3.7%. It is almost certainly too optimistic to expect all of that premium to evaporate. Mr Draghi said only some of the widening in spreads was due to convertibility risk; some, he said, was due, fundamentally, to the weak state of those countries’ finances. Those countries will have to stick closely to the path of austerity, and until they are finished, they can expect tougher borrowing conditions than northern Europe. Despite Mr Draghi’s efforts to portray the purchases as purely within the ECB's monetary responsibilities, there is no denying that they wander far from the ECB's original mandate. That's why the vote was not unanimous. Mr Draghi did not name the lone dissenter, but it was almost certainly Jens Weidmann, president of Germany’s Bundesbank. Though still passionately opposed to the ECB’s bond purchases, Mr Weidmann seems to have made up his mind that he can achieve more as a vocal dissenter inside the ECB than by resigning, as his predecessor Axel Weber did. If only to avoid making Germany and Mr Weidmann even more unhappy, the ECB will not aim to give peripheral countries the same borrowing rates as the northerners. As a result, its actions as lender of last resort will not miraculously restore the potency of its monetary policy. As the experience in both America and Britain shows, even a central bank that has interpreted its lender of last resort role quite broadly and implemented ultra-easy monetary policy can only do so much to counteract the vice of deleveraging, austerity and external weakness. This will be even more so in Europe where the ECB shows no interest in unorthodox monetary policy. The ECB seems to have acted in time to save the euro. Whether it has acted in time to save the euro economy remains to be seen. Previous Euro-zone debt: A modest proposal Next College Enrollment: Mr Clinton should be less concerned * Recommend 141 * * Tweet * Submit to reddit * * View all comments (133)Add your comment Related items TOPIC: Europe » * Charlemagne: All hope not lost * The rich world's economy: The gift that goes on giving * 2012 in charts: The long road to recovery TOPIC: Italy » * Italy’s election: The Ohio of Italy * Politics this week * Italian politics in turmoil: Run, Mario, run TOPIC: Monetary Policy » * Inflation: Shrink this e-dollar * American growth vs. the world: At the top of an underperforming class * Reforming macroeconomics: Claudio Borio on the financial cycle TOPIC: Political policy » * Gun violence in America: Newtown’s horror * The Newtown killing: Evil beyond imagining * Cliff talks: Relief in sight More related topics: * Economic policy * Domestic policy * Government and politics Readers' comments The Economist welcomes your views. Please stay on topic and be respectful of other readers. Review our comments policy. * Add a comment (up to 5,000 characters): ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ Post Sort: * Newest first * Oldest first * Readers' most recommended * 1 * 2 * 3 * next › * last » guest-ioojjwe Sep 9th 2012 22:08 GMT Italy is not going to ask the Ecb to buy Italian Bonds. Italy has more than 400 bilions of euro of state owned properties, good assets that can be sold. It is not Spain, Portugal, Ireland or Greece. Italy can get out of this mess with its own resources. Till now Italy has given money for others ( Ireland, Portugal, Greece and lastly Spain) and has not asked for money yet. So plesase stop bashing Italy. In the 1990s Italy had to pay interests way greater than the 5% on its bonds, and not even then the country went into a default. Hence it is not likely that this scenario can happen now. * Recommend 7 * Report * Permalink * reply Norm.73 Sep 8th 2012 22:52 GMT I have read over the past few years at least one hundred plus of so-called solutions to the euro crisis. With Merkel and the French, and to some extent the un-elected Mario Monti seemingly taking a back seat, we now have the latest hero – Mario Draghi. His solution, using its newly christened Outright Monetary Transactions (OMT), to buy sovereign bonds of one- to three-year maturity, provided the issuing country has agreed to a fiscal adjustment programme with either the European Financial Stability Facility, or its successor, the European Stability Mechanism. This is yet another lunatic idea. Almost every one of the Southern States of Europe has already squeezed most of their voters to the limit, and perhaps beyond. With very high unemployment levels, and businesses closing down daily the tax revenues of these countries have dropped dramatically. So, even if they qualify for these loans, the big question is how do they re-pay them? The answer is they can’t. Countries like Germany and the Netherlands have huge exposure to the debt being created. So, where does all this take them, and again the answer is on a road to nowhere. For me there is only one way to solve the crisis in Europe, and that is to create a climate of growth and prosperity across Europe by reducing taxes on companies and working people to generate new business, and put money into the pockets of the European people to spend on the high street. One way to do this would be to reduce fuel duty. This would reduce the cost of transport, leading to lower prices in supermarkets, and many other goods, which in turn would put money into the pockets of the people of Europe to spend on the high street. The economies of Europe are very different. Some are based on manufacturing and some are based on tourism, with a whole spread of others in between. To expect each and every one of these economies to hold the value of the euro to within the very tight limits imposed is just plain crazy. The simple truth is that the ECB can pump all the printed money into these economies it wants, which will only lead to devaluing the euro, but the fundamental issue is that what most of Europe needs is real growth, not growth based on unsustainable borrowing. It truly is time for the euro to be dropped as the single currency of Europe, and for each and every country in Europe to allow a return to democratic rule where each and every country stands or falls by the actions of its elected Government, which in fact is a return to democracy across Europe. * Recommend 13 * Report * Permalink * reply Monster Truck II in reply to Norm.73 Sep 9th 2012 6:35 GMT I wholeheartedly agree with what you say. This move just transfers risks from one holder (banks and funds) to another (a giant central bank). Directly at least it does nothing to improve the macroeconomic causes of the crisis. Nor it should. The ECB was not created to run Europe, it was created to administer the Euro. I argue along those lines here: http://mounthelicon.wordpress.com/2012/09/09/the-ecb-nuclear-deterrent/ * Recommend 9 * Report * Permalink * reply nutstoo in reply to Norm.73 Sep 9th 2012 14:47 GMT The solution is what we did in the USA in 1920: http://www.youtube.com/watch?v=nl0Xkvx63Hk this follows closely what you suggest! * Recommend 8 * Report * Permalink * reply heated Sep 8th 2012 12:25 GMT The power of the ECB should be unlimited since its soul purpose should be uniting Europe. Past financial faux pas will hopefully be further investigated but in the meantime putting out the fires is paramount. Since the ECB is the lender of last resort and will not insist on senior credit status, they must ensure that investments and bonds are only given to peoples and companies under constant review and scrutiny to ensure their viability. Otherwise bad investments will most surely invite the flight of private capital. The continued path of fair austerity measures will ensure the recovery of indebt nations. All governments must become productive and transparent to make this work.... * Recommend 10 * Report * Permalink * reply nutstoo Sep 8th 2012 0:10 GMT The author needs to take a lesson in monetary policy...Since the ECB can simply print the money it uses to buy bonds, its resources are theoretically unlimited. (It will "sterilize" the impact of its bond purchases on the money supply, but that should pose no constraint on how much it buys.)...you can sterilize until you run out of German bonds to sell. That is not unlimited! * Recommend 16 * Report * Permalink * reply jp.dumas in reply to nutstoo Sep 8th 2012 23:21 GMT "out of German bonds to sell"? it seems that their is a limit to OMT, this is is sterilization, if the ECB asks commercial banks to park the proceed of bonds purchased at the ECB or enter into supply of CB bonds to mop up excess liquidity, there will be a cost for the ECB associated with this sterilisation policy. The cost should be lower than its profit or ECB should ask for recapitalisation to its shareholders. This is the limit. * Recommend 5 * Report * Permalink * reply Dominique II Sep 7th 2012 22:09 GMT An European Central Bank. At last. * Recommend 11 * Report * Permalink * reply nutstoo in reply to Dominique II Sep 8th 2012 0:13 GMT another professional counterfeiter...at last....isn't it great how we can repeal the law of scarcity by just going into your basement and printing pieces of paper... isn't life easy! * Recommend 12 * Report * Permalink * reply Dominique II in reply to nutstoo Sep 8th 2012 6:17 GMT Except that Mario Draghi isn't spelled Hjalmar Schacht. * Recommend 12 * Report * Permalink * reply navalmoral Sep 7th 2012 20:52 GMT The author says that a 50% equivalent of the Spanish GDP has flown out of the country, quoting a Nomura analysis. That figure has been repeated ad nauseam in many Anglo_American media, culminating in a NYT front page last Thursday, based on interviews with two Spaniards who have left the country, saying,literally, that "Spaniards and leaving their country and taking their belongings with them". To start with, the Nomura report has been demostrated false. Another report by Societe Generale,showed that much of the fall in deposits was driven by a change in regulation that caused depositors to shift money into short-term bonds, which are not counted as deposits. As simple as that.As to some Spaniards leaving the country, so what? Well, there are, according to the British consulate in Madrid, 500.000 Britons residing in Spain. A poll conducted two years ago showed that most of them were never thinking on returning to their country, whose conditions many find appalling. Should we conclude, based on the official figures and the poll, that¨"Britons are leaving their country and taking all their belongings with them to find a better living in Spain?" Well, these are the tactics used by media outlets like the NYT, the FT ( aka the Financial Terrorist) or The Economist ( aka The City's Herald). * Recommend 21 * Report * Permalink * reply Confused of Munich Sep 7th 2012 20:35 GMT If every currency in the world, including finally the euro, is now devalued equally by printing as much as needed to pay public debts, then perhaps all countries/zones are economically equal and no-one really cares. The immoral aspect is to steal people´s safe cash within a country or currency zone by generating thereby inflation, while at the same time keeping interest rates below inflation, and thereby forcing them to gamble in the stock market or elsewhere just to keep their wealth (after tax). The banks have a moral duty to at least protect the value of one´s cash capital: that is the promise they make when they issue the banknotes. This is a moral contract with each individual and is not even open to interference when the bank is independent. The interference is clearly visible: this measure is just a subvention of euro debtors and a back-hander to banker who lent your cash in the bank to the debtors; all paid for by a "tax" on the euro cash in your pocket. Don´t remember ever voting for that. * Recommend 22 * Report * Permalink * reply Dominique II in reply to Confused of Munich Sep 7th 2012 22:03 GMT I do not recall such ethical qualms when (basically) the US-dominated World Bank forced a surprise devaluation of 50% in the Franc CFA West and Center African monetary unions, thereby robbing residents of 50% of their "safe cash". Where was the "moral duty" of the banks then? (not to mention that the devaluation's much heralded benefits never materialized, because Africa's trade balance problems were caused much more by US/EU unabashed and ongoing protectionism than by an overvalued currency). * Recommend 15 * Report * Permalink * reply aallison Sep 7th 2012 18:53 GMT There's just one teeny tiny little problem: of the three countries which have entered a full macroeconomic adjustment programme, only Ireland has actually implemented the conditions imposed (and must now be wondering why it did so). Another problem is that when the ECB prints money to buy the bonds of distressed countries, it devalues the euro for all member countries. * Recommend 9 * Report * Permalink * reply nutstoo in reply to aallison Sep 8th 2012 0:23 GMT Every Euro that the ECB prints is a tax on the people who earn their living in Euros. It is theft...and the worse of it all is that its theft from the poorest of European citizens. Most people in Europe make a little over 1000 euros a month, and to have the ECB steal from them...is...well...anyone with a tree and a good rope? * Recommend 14 * Report * Permalink * reply Niels Kristian Schmidt Sep 7th 2012 15:42 GMT The medium term It's all good and well, that Draghi requires conditions. But the core problem remains. Draghi is pushing (again) for laws that replace incentives for discipline. Discipline that should be there via simple competition between banks and between governments to be trustworthy and attractive. The ever more complicated Basel agreements is a bandaid as are many of the highly complicated labor market laws produced over previous decades. Likely, most of them replace market discipline that would stem from open competition, simpler laws and faster judicial rulings. In the 1970s it was the unions and the governments that were out of control at the commanding heights. Now its the banks, pension funds and the governments. Promises, deficits, bail-outs, debt-financing, lender of last resort, insurer of last resort; and then something comes along to reveal that it is untenable; be it an OPEC crisis or a Lehman crash. Where is the incentive to discipline? Incentives control us. We can make incomprehensible regulation to replace discipline induced by simple incentives, but it results in chaos. The echo of the post-1914 banking system rings again and again. Discipline thereafter has to be put in to law again and again because it has been removed from the market by introducing the lender and insurer of last resort. Now Draghi is pushing (again) for these new laws to be implemented faster. Yes, there were fewer crisis 1945 to 1973 than before 1914. But a mountain of debt was built and untenable debts and promises were made which the OPEC crisis revealed. Government deficits exploded after 1973 and since 1979 financial crisis have been more frequent than before 1914 (see A.M.Tayler 2012). Lehman revealed, the financial system is a house of cards with perverse incentives. With the crisis, the pension funds cannot yield what they promised and has been shown to be also a house of cards. The proportion of old people growing will further reveal the untenable promises made for pensioners. To replace discipline: Steady inflation of money and regulation. Regulate this, regulate that, inflate this; inflate that; to get apparent crisis absence and a feeling of New Economy. The core problem of perverse incentives remain unsolved as long as there is a perverted link between one's actions and their consequences. Draghi's solution is, as he says, for the medium term. * Recommend 16 * Report * Permalink * reply MemphisBob Sep 7th 2012 14:45 GMT This will (once again) only buy time. The root of the problem is the lack of structural reform in the periphery which has no will for it. * Recommend 12 * Report * Permalink * reply F R O Y in reply to MemphisBob Sep 7th 2012 15:22 GMT No amount of "reform" will turn Spain, Portugal and Greece into industrial powerhouses. Germany needs to understand tha the EU is a diverse entity and that some of those differences will always remain. Mediterraneans will never be Scandinavians, just like Appalachians and Sotherners will never be Yankees nor Californians. Some countries will always be more productive than others, but what we need to understand is that the whole is more than the sum of the parts, and that the imbalances that plague the EU come from both ends. You can indeed be "too virtuous". Depressing your salaries to become more productive will benefit your own economy, but it will affect negatively that of your European partners. Until our statesmen (and stateswomen) don't understand this, stop pursuing short-term parochial goals, and embrace a grander pan-European vision that tackles the Union's imbalances and contradictions that are at the root of its problems, you can certainly be sure that any measure will only serve to "buy time". * Recommend 17 * Report * Permalink * reply Josh_US Lux in reply to F R O Y Sep 7th 2012 18:46 GMT "No amount of 'reform' will turn Spain, Portugal and Greece into industrial powerhouses. Germany needs to understand tha the EU is a diverse entity and that some of those differences will always remain." _______________________________ Probably so. And the Greeks, Portuguese, Spanish should in return accept that they will never enjoy the same standard of living as e.g. the Germans or Dutch - and that the latter won't sponsor it, either. * Recommend 19 * Report * Permalink * reply Jospain in reply to Josh_US Lux Sep 7th 2012 19:06 GMT What a load of b.... You simply have no idea about spanish markets or companies. The only new EUROPEAN company in the biggest 500 since 1970 is spanish (Inditex and that is only a limited example: I can mention many more) We have indeed a huge real state bubble burst and its dire consequences together with inefficient administration, All this racist comments only show your limitations * Recommend 12 * Report * Permalink * reply Jospain in reply to Josh_US Lux Sep 7th 2012 19:06 GMT What a load of b.... You simply have no idea about spanish markets or companies. The only new EUROPEAN company in the biggest 500 since 1970 is spanish (Inditex and that is only a limited example: I can mention many more) We have indeed a huge real state bubble burst and its dire consequences together with inefficient administration, All this racist comments only show your limitations * Recommend 13 * Report * Permalink * reply navalmoral in reply to F R O Y Sep 7th 2012 20:36 GMT This kind of comments show to what extent the view in many Nordic and Anglo-American countries about the current eurocrisis is a mixture of ignorance, prejudice and outright racism against the Southern Mediterraneans. To start with it is a fallacy that to be prosperous you need to be a powerhouse. Since the 1970s at least most developed economies are based on the service sector. Secondly, this crisis, as many others before, was started by the financial sectors in the US and the UK, not in the eurozone and not in the Mediterranean countries, which have become the convenient scapegoat for the corruption, greed and incompetence of US, UK and, yes, German bankers. In the UK their banks had to be bailed out with a stagering 500 billion pounds in 2007 and the country is still in recession, plagued by scandals like the LIBOR, and with parts of its society torn apart, which explains the London riots just a year ago. And, by the way, concerning Spain, it has first class multinationals in the service and also the industrial sector (including the aerospace industriy and high speed trains) and its main exports are not oranges, but intermediate machinery, cars and chemical products. A little less of prejudice and much more information would be highly welcomed in this kind of debates * Recommend 10 * Report * Permalink * reply longvie.ws Sep 7th 2012 13:38 GMT Draghi's move is a necessary step but what MUST be done is to end austerity in the edge states. Only then can the economies of Europe start to move forward instead of backward. A grand bargain must be reached. http://www.longvie.ws/a-path-forward-for-europe/ * Recommend 17 * Report * Permalink * reply MickyK Sep 7th 2012 12:11 GMT What about Ireland and countries alike (those who sought bail-outs from the Troika) in this context? Initially, there were problems with countries' finances and sovereign debt, the latest attempt to stablise the Euro taken by the European Central Bank (ECB) is simply writing a blank cheque for the process to happen (or potentially) all over again. Is there potential for Moral Hazard to occur? I understand that there are pre-requisites to avail to gain these funds and fical constraints to adhere to but surely this gives carte-blanche to those who should have known better previously? * Recommend 14 * Report * Permalink * reply Carlos Collaco Sep 7th 2012 10:01 GMT Finally the ECB is beginning to sound like a Central Bank for all countries sharing the single currency. When called upon to deliver directly on its latest announcements then only will European citizens across the eurozone acknowledge they have not been thrown entirely into the frying pan of financial markets. For all the specificities of which there are many the whole gambit boils down to this. It is only fair to say Mario Draghi has made some solid statements on the ECB's readiness to uphold the Euro. He has spoken up consistently since taking over the ECB's top job from JCTrichet. Yesterday he made good on those statements by cobbling together a set of measures that redefine the ECB's role in the current Eurozone context. However, it cannot go unnoticed that it took Spain's size and potentially Italy's - or nightmarishly both together - to force the ECB spring into action. While small countries were targeted by bond markets eventually succumbing to the bailouts, the ECB in retrospect effectively failed to stand up for them in earnest. The ECB has at long last seized its role as a Central Bank would for the Euro-17. At national and EU level focus must equally shift to growth policies. Not a theoretical approach but a very clear and pragmatic one. Importantly, to where sound economic growth is to be generated in the future across many countries. Ultimately the only way for any country/economy to settle dues and refinance itself in the now all but shuttered financial markets. * Recommend 14 * Report * Permalink * reply MarkDowe Sep 7th 2012 9:50 GMT Mr Draghi’s unveiling of a package of measures is designed to ease the strains in Europe’s debt crisis and secure the future of the single currency. His announcement that the European Central Bank (ECB) was creating a new bond-buying program, called Outright Monetary Transactions (OMT), will replace the previous program and will see the ECB buying short-term bonds of between one and three years and will have no limits. Countries that have their bonds bought will have to accept certain conditions, largely dependent on their state finances, and will be part-monitored by the International Monetary Fund (IMF). The bond purchases will not increase the money supply in the 17-country eurozone which will not be any undue pressure on inflation. But while the ECB has done almost exactly what was expected, the weak economic outlook continues to loom. It seems certain that the ECB will need to ease policy further in the months ahead. Yesterday’s announcement will, though, help to contain the crisis and its measures should be seen as positive. The next stumbling block will come when the countries request this aid which, as Mr Draghi has said will come with strict conditions. There is likely to be long negotiations over these conditions, particularly with Spanish Prime Minister, Mariano Rajoy, and Italian Premier, Mario Monti. They will be unwilling to take anything too severe given the harsh cuts and reforms already being implemented in both countries. And, whilst suppressed borrowing costs will certainly provide relief in the short-term, they will not resolve problems of solvency and debt unsustainability. The program provides a small measure of additional liquidity support to countries that request and receive a bailout, but it is not designed to ‘rescue’ EU sovereigns. Rather it is to ensure that the deterioration of sovereign credit quality doesn’t result in a sharp drop in economic activity or result in deflation. The OMT is certainly not a cure-all political or financial instrument. * Recommend 46 * Report * Permalink * reply Martin-Poland Sep 7th 2012 8:27 GMT The only currency that is not irreversible is gold! All other currencies were vanishing and now are just a history. * Recommend 11 * Report * Permalink * reply Nikolaus_V Sep 7th 2012 7:48 GMT Debt, I was once told, is at some point not the problem of the borrower any more. Just another thought: Isn't this bond-buying programm kind of an insult to the respective parliaments of the so-called "crisis states"? Since it would be - historically spoken - their task to decide on a decent budget which they can afford? As a member of parliament, I would be careful to praise this decision by the ECB. * Recommend 13 * Report * Permalink * reply forager in reply to Nikolaus_V Sep 7th 2012 12:40 GMT Perhaps some of those parliaments are deserving of an insult. * Recommend 14 * Report * Permalink * reply PROCYON Sep 7th 2012 6:29 GMT Mr. Draghi's last words in the press conference echo the concerns of many that structural reforms and fiscal compact in the Euro area needs to be the center of attention as earlier bouts of ECB actions hardly produced the desired effect as monetary expansion is feeble in spite of all the efforts. His last words are as follows: "On the structural side, further swift and decisive product and labour market reforms are required across the euro area to improve competitiveness, increase adjustment capacities and achieve higher sustainable growth rates. These structural reforms will also complement and support fiscal consolidation and debt sustainability. On the fiscal front, it is crucial that governments undertake all measures necessary to achieve their targets for the current and coming years. In this respect, the expected rapid implementation of the fiscal compact should be a main element to help strengthen confidence in the soundness of public finances. Finally, pushing ahead with European institution-building with great determination is essential." Procyon Mukherjee * Recommend 12 * Report * Permalink * reply marting456 Sep 7th 2012 5:58 GMT Not many people seem to be concerned that the ECB's mandate specifically prohibits it from buying government debt. I think they put that clause in there for a good reason. So why is the ECB doing it? Because nobody in the EU thought about actually enforcing the law. Soon the rule of law will mean no more in the EU than in Russia. * Recommend 29 * Report * Permalink * reply F R O Y in reply to marting456 Sep 7th 2012 15:25 GMT It was a stupid law to begin with. Buying your own debt is one of the basic tools of any Central Bank. It was about time the ECB started behaving like one. * Recommend 13 * Report * Permalink * reply marting456 in reply to F R O Y Sep 7th 2012 19:27 GMT Then why do you need the ECB in the first place? Let the governments just print as much as they need. * Recommend 11 * Report * Permalink * reply Andruze Sep 7th 2012 5:31 GMT Printing money to purchase government bonds will only devalue the Euro, but maybe that's what they want to stimulate exports? * Recommend 16 * Report * Permalink * reply Rincewind_wizzard in reply to Andruze Sep 7th 2012 9:27 GMT No, they want to do it to spread the loss that would otherwise have to be taken by a few rich and well-connected creditors to all savers holding the euro. * Recommend 16 * Report * Permalink * reply F R O Y in reply to Andruze Sep 7th 2012 15:28 GMT The financial crisis is making the Euro's value plunge anyway. It was 1.5USD back in 2008, and now it barely reaches 1.25$. In any case, worrying about inflation under the current circumstances seems pretty absurd. We have much greater fish to fry right now. * Recommend 16 * Report * Permalink * reply MeathMan Sep 7th 2012 4:42 GMT Hilarious how much whinging ECB QE gets compared with the stuff done by the Fed and Bank of England. It is merely acquiring the tools that other central banks have long had and the lack of these tools in the Eurozone was causing major stresses. * Recommend 24 * Report * Permalink * reply Liquidator in reply to MeathMan Sep 7th 2012 11:27 GMT Well, given that the financial crisis of 2008 came from the US and the UK, continental europeans should be quite happy to have a "active" central bank now, and be joyfully awaiting the next financial crash caused by an abundent money supply. * Recommend 8 * Report * Permalink * reply * 1 * 2 * 3 * next › * last » * Comment (133) * Print * E-mail * Permalink * Reprints & permissions * About Free exchange Our economics correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts Follow us on Twitter @EconEconomics RSS feed Advertisement Economist radio Explore trending topics Comments and tweets on popular topics Latest blog posts - All times are GMT [_0011_democracy-in-america.png] Presidential power: When is a recess really a recess? 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