ECB’s Intended Bond Purchases Will Calm The Markets; But For How Long?

The European Central Bank’s decision to buy unlimited bonds from the secondary markets for the peripheral economies was the right decision, since it comes with strong conditions that will result in structural reforms and fiscal discipline, says Anders Aslund, Senior Fellow at the Peterson Institute for International Economics.

The so-called Outright Monetary Transactions or OMT by the central bank does not violate the Maastricht Treaty, which prohibits direct purchasing of government bonds since the bank will buy them from the secondary market.

Germany’s opposition that this amounts to lending the profligate governments, albeit indirectly, is thus allegedly not maintainable. Moreover Chancellor Angela Merkel herself backed the plan couple of weeks ago, he noted.

The OMT kicks in only when the struggling countries make a formal request for international aid, but neither Italy nor Spain has made any formal request so far. Is it because of the stigma attached?

One of the reasons may be the admission of having to seek a full-blown bailout. But the key reason may be that the IMF has been kept out of the loop making the whole entire process seem like a big challenge.

The ECB has decided to give up its “preferred creditor” status while announcing the latest round of bond purchase program. Will it boost investor confidence in the backdrop of a default scenario?

Indeed this is a major development, noted Aslund since the ECB will suffer along with private investors in the event of a default. When Greek debt was restructured, private creditors lost three-quarters of their money while the ECB made profits due to its preferred creditor status.

Is the latest measure a short-term solution or will it mark the beginning of much needed long-term structural reforms for greater solvency?

According to Aslund, the turning point was the European Summit at the end of June when a pan-European banking union was approved. Thursday’s announcement by Draghi will dispel worries over the central bank’s ability to implement its policies, he observed. You can watch the video here.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
This entry was posted in Market Commentary and tagged , . Bookmark the permalink.

Comments are closed.