Friday, December 3, 2010

European Central Bank buys bonds of sovereign nations

The European Central Bank president, Jean-Claude Trichet, said he would keep giving banks unlimited liquidity well into next year but made no guarantee to step up the bond-buying to combat investor panic surrounding Portugal and Spain. The Guardian, Dec 3, 2010.

"The securities market programme (SMP) is ongoing, I repeat ... ongoing," he said after the ECB's monthly policy meeting left interest rates at 1%. "I won't comment on the observations of market participants."
The ECB started buying bonds through the SMP in May and has so far spent €67bn (£57bn), most of it during the first three weeks of the programme.
Analysts say that the ECB may well have to do so again soon if the eurozone debt crisis threatens to push Portugal and Spain to seek bailouts, as Ireland and Greece already have. "We continue to look for €100bn of purchases by the beginning of next year including Spanish securities," RBS economist Jacques Cailloux said in a note to investors.
It is not clear to me how the ECB pays for the bonds it buys. But, I suspect they make a loan just like a commercial bank would do (if they weren’t scared to finance sovereign nation debt in risk of default. That is, they just write numbers after a country’s name—they don’t borrow from the market first.

So has the banking system come round to my suggestion of zero-interest public debt? I think so, the only difference is that I have advocated that the public debt be used for stimulus type investments such as building public infrastructure. If the ECB can keep Ireland from going broke, it will certainly help public employment from tanking any more that it has. But, it won’t put the unemployed back to work, whose income would bolster consumer demand.
As one might suspect, the central bank is more interested in rescuing banks than in providing employment. Note that the central bank can do what it is doing without any legislative action. An expanded stimulus program, would need legislative authorization, and the western world’s legislatures seem more interested in adopting austerity programs (Ireland is an example) than in providing jobs. Of course, the austerity is likely to impact the relatively poor people rather than the relatively wealthy! So what else is new?

1 comment:

The Arthurian said...

Note that the central bank can do what it is doing without any legislative action.

An important point.