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The ECB goes shopping
The reluctant rescuer
Aug 8th 2011, 16:16 by P.W. | LONDON
ONCE again, as the euro area appeared to teeter at the edge of an abyss, a sharp tug from the central bank has restored a margin of safety, albeit a slim one. In May 2010, as markets were panicking about Greece, it was the decision by the European Central Bank (ECB) based in Frankfurt to start buying Greek government bonds in the markets that calmed nerves as much as the euro-area governments’ decision to create a new bail-out fund, the European Financial Stability Facility (EFSF). This week, the ECB has pulled off the same trick by deciding to purchase Italian and Spanish government bonds at an emergency weekend conference-call meeting of its 23-strong governing council.
The move was prompted by market pressures building on the much bigger economies of Italy and Spain, as yields on their debt threatened to reach unsustainably high levels. The jitters were all the more remarkable given that an emergency summit of European leaders on July 21st to agree upon a second rescue for Greece had also sought to reduce the risk of sovereign-debt worries spreading to other vulnerable countries by expanding the role of the EFSF, allowing it to intervene in secondary markets as well as to extend lines of credit to such economies.
The trouble is that the bail-out fund will not be able to do this until its new remit is ratified by the 17 euro-area governments this autumn. Even an emergency return by leaders from their (wrecked) summer holidays would not help unless parliaments were recalled, too; and that might stoke even greater alarm. In any case, the package due to be ratified failed to boost the size of the fund beyond the already agreed target of an effective lending capacity of （此处为欧元符号）440 billion ($620 billion). That is enough to finance the rescues of Ireland and Portugal and the second bail-out of Greece, but would be insufficient to deal with Italy, let alone Italy and Spain.
The ECB, by contrast, can act now. And, potentially, it has unlimited firepower since it can pay for any purchases by creating money. Certainly, the mere threat to intervene in Italian and Spanish markets was sufficient to cause a sharp fall in yields as the markets opened on Monday August 8th.
But the ECB is a reluctant rescuer. Indeed until this month it had not made any bond purchases since March, leaving their total book value around （此处为欧元符号）75 billion. It made some last week, but disappointed markets because they were confined to Irish and Portuguese bonds; and even these were opposed by some members of the governing council, notably Jens Weidmann, the president of the German Bundesbank. The ECB’s decision to purchase Italian and Spanish government bonds was reactive rather than pre-emptive and followed immense pressure from political leaders
The ECB has its reasons for treading cautiously. Its foray into Greek bond purchases has left it nursing big losses if they were valued at market prices. But even more than potential damage to its balance sheet, the central bank’s really big worry is about its credibility, since the purchases drag it into what is in effect fiscal rather than monetary territory.
That reluctance suggests that the bond-buying rescue will do no more than contain the latest outbreak of nerves. If Europe is to get on top of its sovereign-debt crisis, it must build a much more secure fiscal underpinning to its shaky monetary union. And that will involve winning support from voters in the creditor countries, notably Germany, who fear precisely that outcome. That is the real job that awaits European leaders when they return from their summer vacations.
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