At its meeting today in advance of tomorrow’s scheduled announcement of yet another plan to save the eurozone’s banking system, the European Central Bank (ECB) will discuss a plan put forward by ECB President Mario Draghi. Some details of the plan have been leaked and Bloomberg News has reported on what Draghi’s plan is expected to contain.
First, there will be no yield caps, something that many observers had expected. Second, there will be no limit on the amount of bonds that the ECB may purchase. Third, the purchases will be sterilized in order to prevent inflation from rising. Fourth, so-called “conditionality” will be included, with the ECB empowered to sell the sovereign bonds if the conditions of the purchase are not met. Fifth, the ECB will target its buying at bonds with maturities of three years or less.
Depending on your point of view, either the unlimited nature of the plan or the conditionality of the purchases is the most important item in the list. Without a limit, the ECB must do something to sterilize the purchases. Otherwise, the infusion of money into the eurozone could send inflation soaring. To avoid that, the bank will have to figure out a way to soak up liquidity from the eurozone’s sovereign central banks. That should not be too hard, but it will be tricky.
On conditionality, this is probably a requirement that Germany and other northern eurozone countries will insist on. In exchange for purchases of the sovereign bonds, countries like Greece, Spain and probably Italy will be required to accept terms that would allow the ECB to dump the bonds if the terms are not met.
Paul Ausick
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