Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Spanish and Italian bond yields have fallen significantly this morning as a news item in Spiegel that the ECB is considering a plan to set a limit for sovereign yields. This would be a big change in strategy and more along the lines of bazooka. In fact, this is the type of thing Hank Paulson meant when he said if you set a clear signal to markets you really don’t have to take the bazooka out of the pocket. If the ECB said Spanish yields won’t be allowed to go over X, who is going to bet against them? Interesting development but the political implications are interesting as this would signal (in theory) the potential for unlimited bond buying which the Germans are against. Whatever happens, it is clear the ECB is turning much more similar to the Bernank in policies…
- As part of its efforts to fight the euro crisis, the European Central Bank (ECB) is considering establishing caps on interest rates for government bonds in individual countries as part of its future bond-buying program. Under the plan, the ECB would begin purchasing government bonds from crisis-hit countries if yields for those bonds exceeded the interest rates for benchmark German sovereign bonds by a predetermined amount. This would signal to investors which interest rate levels the ECB believes to be appropriate.
- Given that it can print money itself, the central bank has access to unlimited funds, which could make it extremely difficult for speculators to continue driving yields up beyond the amount stipulated by the ECB. By engaging in bond buying, the ECB not only wants to get the financing costs of crisis-plagued countries under control — it also wants to ensure that the general interest-rate levels across the euro zone do not drift too far apart.
- During its next meeting at the beginning of September, the ECB’s Governing Council is expected to decide on whether the interest-rate goal will actually be implemented. However, it has already been decided that the ECB will be more transparent in the future about its bond purchases. Looking ahead, the ECB plans to publicly state the volume of bonds it has purchased from each country. This information is to be published immediately after the purchase takes place. Under current practice, the ECB announces on Mondays how much, in total, it spent on buying bonds the previous week.
- Calls for such action are growing. In an interview with state-owned news agency EFE, Spanish Economics Minister Luis de Guindos called for the ECB to purchase unlimited amounts of Spanish sovereign bonds on the capital markets. He argued that that would be the only way to effectively reduce interest rate pressure on Spanish sovereign bonds and to eliminate doubts about the euro.
- ECB President Mario Draghi has signaled the prospect of the ECB undertaking that kind of step, but only under the precondition that countries such as Spain or Italy first make a formal request for EU aid, which would involve agreeing to the conditions attached to that assistance. The question of what a country would have to do in return for the ECB buying its bonds is expected to be discussed at a meeting of Euro Group finance and economics ministers that is scheduled for the second week of September, de Guindos said.
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