Yes, as discussed, looks like the ECB continues to facilitate funding by continuing the same bond purchase strategy, along with dictating terms and conditions.
For the member nations, compliance means continued funding.
Continued funding + compliance with deflationary austerity measures + no ECB buying of fx = euro strong enough to work to keep net exports from increasing.
And the possibility that the ECB decides to change course remains evidenced by the steep yield curves of member nations.
By Ralph Atkins in Frankfurt and Richard Milne and David Oakley in London
Published: November 30 2010 18:52 | Last updated: November 30 2010 18:52
Jean-Claude Trichet, European Central Bank president, has left open the possibility of the bank significantly expanding its government bond purchases and warned markets not to underestimate Europe’s determination to resolve the escalating eurozone crisis.
The hint that the ECB could recalibrate its response to the unfolding crisis came as the premiums that Italy and Spain pay over Germany benchmark interest rates hit fresh highs since the launch of the euro. The euro’s monetary guardian had already stepped up purchases of Portuguese bonds, traders reported.
The ECB’s bond purchase programme has been controversial within its governing council since its launch in May, with Axel Weber, president of Germany’s Bundesbank, voicing his opposition publicly.
But the pace at which the crisis has spread has altered the debate within the ECB, which could justify stepping up its intervention by arguing governments’ borrowing costs were far out of line with fundamentals, signalling dysfunctioning markets.
Speaking in the European parliament on Tuesday, Mr Trichet would not comment “at this stage” on the bond programme “in the light of the current situation”. But the programme was “on-going” and decisions on its future would be taken by the 22-strong governing council, which next meets on Thursday. He also refused to rule out the possibility of eurozone governments issuing joint bonds, although the ECB was not endorsing such a step.
Since May, the ECB has spent just €67bn under its bond purchase programme. Financial markets, however, see the ECB increasingly as the only institution with pockets deep enough pockets to ease the crisis.
The ECB thinks financial markets are badly mis-pricing risk. Mr Trichet said that “pundits are under-estimating the determination of governments”. Eurozone growth was proving surprisingly strong, and Ireland’s bail-out at the weekend had shown the EU was capable of responding to crisis. “I don’t think that financial stability in the eurozone, given what I know, could really be called into question,” he said.
Willem Buiter, chief economist at Citi, said: “The involvement of the ECB is likely to rise, despite its statements – and probably wishes – to the contrary.” He argued recently that the ECB backed by governments could give the new European bail-out fund a €2,000bn loan.
Gary Jenkins, head of fixed income at Evolution Securities, argued the ECB could try “real quantitative easing” through purchases of €1,000bn-€2,000bn of bonds. “It might be politically unpalatable. But it would be an immediate way of creating a firebreak.”
Mr Trichet has insisted repeatedly that the ECB is not engaged in “quantitative easing” as it has withdrawn liquidity from the financial system equal to the amounts it has spent on bonds, neutralizing any inflationary risks. That policy would almost certainly continue under an expanded scheme.