Posted by WARREN MOSLER on December 28th, 2010
The Fed is conducting it’s QE to lower the risk free term structure of rates for the further purpose of supporting lending in the economy in general.
The ECB is buying member nation debt in the marketplace specifically to help member nations fund the deficits and avoid default.
What the ECB is doing for Greece, Portugal, and Ireland is more analogous to what the Fed did a couple of years ago when it bought corporate debt (commercial paper) from the likes of GE and GM to keep them afloat.
In fact, the ECB can’t ‘expand into US Federal Reserve-style“quantitative easing” ‘ even if it wanted to, because there are no euro equivalents of US Treasury securities. (Not that the Fed’s QE does anything of substance for the US economy, inflation, or the dollar.) About the closest the ECB could come to a ‘Fed style QE’ would be to receive fixed in euribor swap market, which is not even a consideration, as their issue is the solvency of their member nations and not the risk free term structure of rates in general.
Meanwhile, as previously discussed, as long as the ECB keeps buying, it all muddles through.
ECB Increases Intervention in Bond Markets
The European Central Bank increased its intervention in government bond markets last week, indicating that the euro’s monetary guardian remained wary of an escalation of the eurozone debt crisis.
Purchases under the ECB’s securities market programme rose to €1.1 billion ($1.4 billion) from €603 million in the previous week, according to figures released on Monday.
The acceleration highlights how the ECB has been forced into action to prevent governments’ borrowing costs spinning out of control, even though it sees the main responsibility for restoring investor confidence in Europe’s 12-year-old monetary union as lying with political leaders.
The previous week’s figures had pointed to a lull in the ECB’s intervention. The rise came in spite of thin trading before the Christmas and new year holidays.
The ECB argues its action is aimed simply at correcting malfunctioning markets – and will not be allowed to expand into US Federal Reserve-style“quantitative easing” to support the economy.
“Helping governments cannot and should not be a goal of these operations,” Jürgen Stark, an ECB executive and one of its governing council’s more hawkish members, told the German newspaper Stuttgarter Zeitung at the weekend.
The latest increase could add to the discomfort of ECB policymakers, however, if it encourages expectations that the ECB will become more aggressive.
Because of the increased risks it is bearing, the ECB said this month it would double to €10.76 billion its subscribed capital, which would allow it to increase provisions against losses.
The announcement triggered speculation that the ECB was preparing to accelerate its bond purchases. However, Mr Stark said the increase had “nothing to do with the current situation but dates from analysis that we started in 2009”.
The ECB began buying bonds in May, at the height of this year’s eurozone crisis. After weekly purchases of €10 bilion or more, the programme was scaled down, with the weekly figures sometimes falling to zero.
But in early December the programme was reactivated – although still not up to its initial scale.
The ECB does not give precise details but recent purchases are thought to have been concentrated on Portuguese and Irish bonds, where financial market tensions have been focused.
Total purchases since the programme started in May have reached €73.5 billion – an amount the ECB will on Tuesday seek to reabsorb from the eurozone financial system to offset the inflationary impact of its action.