Tuesday 21 August 2012

Nice Idea, No Implementation

According to Der Spiegel's article, the ECB has come up with one of the best ideas I have seen (and for the first time I am not being ironic): "The bank is considering setting yield targets on the bonds of euro-zone countries. Should interest rates exceed those levels, the ECB would intervene by buying up their debt." I do not know whether this was supposed to be Draghi's idea or it belonged to someone else, however, this could bring peace to European nations given the yields they are currently facing. On this announcement, the yield on Spanish 10-year bonds fell by 0.15% (or 15 basis points) to 6.29%.

The only problem with this idea, would be defining what would that specific yield be. In my opinion, capping the interest rate a country will pay on new bonds issues would be a more feasible strategy. This would stabilize the interest rates to bearable levels, and not permit the paying of 7-8% rates which make the debt burden unsustainable.

The idea was however denied by the ECB yesterday, with the bank stating that the article was "absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council". As usual, every time an idea is proposed, the procrastination, bureaucracy and lack of initiative within the ECB (to be fair I also blame the lack of independence) destroy it.

On a similar note, the Spanish Finance Minister, Luis de Guindos, asked for the ECB's bond buying in the secondary market to be of unlimited duration and size. I guess that Luis has never heard of moral hazard. Moral hazard would mean that if every time a country messes up the ECB runs to aid it, the country would never be afraid to mess up. However this conversation seems to be futile as the stubborn officials in the Bundesbank stated their opposition to bond purchases.

Now what is left to see is how the ECB would react with regard to Spanish and Greek debt. The Greeks seem to be in need for an extra 2.5 billion euros to satisfy their needs and the Spanish will most probably need a whole lot more.

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