The ECB's Wall Against Contagion

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:

ecb_securities.jpg

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.

eugraph.jpg

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.

Reader Comments

Antonio Maria

November 22, 2011 6:20 PM

Graphics to an unthinkable disaster! There will be a moment in the near future when someone will have to brake the Derivatives Beast, or...

Wallace Marshall

November 22, 2011 9:18 PM

Where does the ECB get the money to purchase Spanish and Italiam bonds? Does it just "print" money the way our Federal Reserve does?

mauricio

November 22, 2011 11:03 PM

the money comes from GERMANY

Adrian

November 23, 2011 1:11 AM

As usual, the politicians cannot and never will come to a conclusive decision that will actually have any lasting inpact. Or rather, none that will not effect their own political standings, that is.
It will be the usual 'too little, too late' scenario and even when the ECB bends to their demands to issue bonds it will only have a limited impact as it will be TOO LATE.
The markets are now becoming used to the relief rallies followed by dissapointment and as the crisis continues it becomes ever more obvious that there has to be a radical change in the Euro make-up.
Even if the debt situation were to be cleared tomorrow, where will the growth come from going forward to ensure that the same countries do not build up their debt again?
If the answer to this questiuon is 'austerity' then forget it. why should any country go through years of hardship to prop up Germany's surplus and living standards for the next ten years?
Germany needs to bite the bullet and accept some inflationary situation going forward if it wants to hold together the very area that has allowed it to become so financially and economically strong.
Whichever way the cookie crumbles, the Euro has to depreciate considerably. The Germans cannot have its cake and eat it!

ithamara

November 23, 2011 5:58 AM

greece will default within a week.
just get out of stock

John

November 23, 2011 8:02 AM

There is a simple answer to all this.

1. Outlaw derivative credit default swaps created by the banksters for the benefit of the banksters. The average person doesn't even know what they are and they are just a financial instrument with a promise that can never be kept. Imagine writing an insurance policy that you would have to pay up on if italy were to default on its debt. No one entity, even the united states itself, can guarantee or insurance a country's debt.

2. Repudiate the debt. The debt was created from nothing. Those who own the debt notes have to realize it will never be paid back.

3. Change the economic system. Everyone keeps asking the question, who's going to pay the debt off or there is only one way out and that is to cut, cut, cut, which in itself only creates more of a debt and deflationary spiral.

Eliminate interest payable on government debt. It is ludicrous. The system overall doesn't have enough dollars or pesos or whatever to pay back the interest and principal combined and is just a huge ponzi scheme created by the banksters for the banksters.

The question here is, what other kind of system can there be other than the one we have?

If you were shown this, it is very possible that it is too difficult to transition to because the "system" is corrupt and desires more power therefore is resistant to eliminate the existing system and is at all levels of government. Leaders who get this and who have tried to change it have been assassinated.

Lincoln. Kennedy. Even so-called dictators in other countries who are "eliminated" and cast as terrorists because they threatened the very system created by the few for the few.

Creating a new system requires the people to take back what is already ours and we have given away freely without knowing it. The good faith credit of our signature that is used when we sign on a mortgage or loan to pay something back.

There is a way. If you want to find out more go to www.economiccures.com and watch the wealth pump videos. this will show you the problem with the system today and how it can be fixed by the people for the people.

The end of the existing system is near. Everyone knows it but doesn't see a way out with the information available to most. It is time to start to get educated and take back the country you were born in from the ground up.

Victor

November 23, 2011 8:32 AM

The Germans are about the most inflexible, rigid and ironically hardworking people in the world. This crisis demands economic creativity that nobody in Europe has, yet they still maintain a stupid air of superiority along with the USA, so the best deal is to have the whole thing broken up the sooner the better. The alternative will be anarchy and a repeat of the WWII.

kevin

November 23, 2011 10:05 AM

Any reasonable person knows where the solution lies. The fed along with our government have provided intelligent lasting solutions to our problems here in the U.S. and the same should be done in Europe. Stop playing around and just give out free money. It always does the trick.

genauer

November 23, 2011 10:37 AM

Germany has been stronger and better off before the Euro. We want to eat our cake for ourselves and not permanently give it to others, who don't pay.

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About

Financial markets are on the edge as investors await a solution to the European debt crisis. This blog examines the banks that hold billions of euros worth of Greek, Italian, and other sovereign debt; the governments that must pay off or refinance that debt; and the implications for the worldwide financial system if they can't.

Analyses or commentary in this blog are the views of the author and or commentators, and do not necessarily reflect the views of Bloomberg News.

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