Posted by: Ben Vickers on November 22, 2011
The European Central Bank added another layer to the wall it’s building to stem contagion from the euro debt crisis. The bank added to its purchases of government bonds last week, settling another €7.99 billion in the five days to Nov. 18. That brings the total amount of securities held “for monetary policy purposes” to €254.4 billion—almost half of which has been acumulated since the ECB began scooping up Spanish and Italian bonds in August to prevent a spike in yields.
This is the wall between Spain and Italy and the unthinkable:
The aim of the purchases is to stop the cost of government borrowing from going too high. The central bank says it’s a temporary exercise. EU governments plan for the European Financial Stability Facility to take over the purchases once the fund is up and running. Without the EFSF the ECB would be stuck in a role that is unsustainable—expanding the ECB’s balance sheet indefinitely would lead to disaster.
But how successful has this strategy of bond purchases been? After all, it is part of the program the EFSF will follow when it takes over. The constant increase in the amount of bonds held by the ECB may have slowed the rise in yields for Spain and Italy, but it hasn’t stopped them going up: the spread between German debt and that of Spain and Italy is widening.
If the EFSF is no more effective than this, other measures will be required. Only stronger austerity measures from the two countries’ new governments will definitively halt the rot.