The Wall Street Journal – Europe Bank Weighs Bond Strategy
ECB Officials Consider Using Informal, Flexible Yield Targets in a Potential Program of New Purchases
European Central Bank officials are considering steps to keep government bond yields in struggling euro members from rising too high, without committing to explicit caps that could threaten the central bank’s balance sheet and independence, according to a person familiar with the matter. The central bank wants to help bring down government financing costs through targeted purchases of government bonds, while preserving their flexibility to change course when needed and to maintain pressure on governments to rein in budget deficits and revamp stagnant economies. To achieve that delicate balance, officials are moving in the direction of informal, flexible yield objectives for shorter-maturity bond yields of Spain and other at-risk countries, according to the person familiar with the matter. The central bank is unlikely to finalize anything before its Sept. 6 policy meeting, at the earliest. Yet the basic contours are starting to take shape.
MSN/Money – Bill Fleckenstein: Europe readies the printing press
Europe’s central bank appears to have created a path to implementing Fed-like easy-money policies. If so, it is a huge game-changer for Europe, and the world, as inflation fears come to the fore.
Bundesbank execs take summer tour of the Maginot Line “He signaled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law. “Mr Asmussen told the Frankfurter Rundschau that the surge in Club Med bond yields over recent months ‘reflects fears about the reversibility of the euro, and thus a currency exchange risk’ rather than bad economic policies in struggling states. “The choice of wording is crucial. If it can be shown that the ECB is acting to avert EMU break-up — known as ‘convertibility risk’ — bond purchases would no longer be deemed a bail-out for Italy and Spain. “Mr Asmussen confirmed that purchases may be ‘unlimited’ in scale, a far cry from the half-hearted intervention of the past two years, which failed to stem capital flight.”
Reuters – Merkel backs Weidmann, warns allies on Greece rhetoric
German Chancellor Angela Merkel voiced support for Bundesbank chief Jens Weidmann on Sunday, saying she welcomed his warnings about the handling of the euro zone debt crisis and saw his influence within the European Central Bank as positive.
In an interview with public broadcaster ARD, Merkel also cautioned politicians in her coalition against talking up the possibility of a Greek exit from the euro zone, urging them to weigh their words “very carefully”. Weidmann, a former adviser to Merkel, reiterated his opposition to ECB President Mario Draghi’s plans to buy the bonds of stricken euro members Italy and Spain in a weekend interview with German magazine Der Spiegel.
The New York Times – German Official Opposes European Debt Purchases
The president of the German central bank said in an interview published Sunday that he remained staunchly opposed to government bond purchases by the European Central Bank, a position that could make it more difficult to deploy a weapon many economists believe is essential to saving the euro. But in a sign that the mood in Germany could be shifting, Chancellor Angela Merkel adopted a more dovish tone during a separate interview. She told members of her governing coalition to stop talking about Greece leaving the euro. “We are in a decisive phase in the battle against the euro zone debt crisis,” Ms. Merkel told ARD television. “Everyone should weigh their words very carefully.”
MarketWatch – Internal discord leaves ECB’s threats toothless
Bundesbank’s Weidmann undercuts Draghi
As soon as the bond purchases are announced, Jens Weidmann, the Bundesbank president, could announce that he disagrees with the conditionality, the volume and the principle of the purchase program. The Bundesbank may of course go along with the action, out of “European solidarity”, but this would be under sufferance, and the German central bank would reserves the right permanently to pass critical comments. At home and abroad, there would be a negative political reaction. The result: reduced effectiveness, higher risk, lower confidence. Just the opposite of what the ECB had in mind. Probably, the mere threat that the Bundesbank might act in this way would be enough to stop the program occurring. This may be what Weidmann has in mind. Why else would he give an interview with the German news magazine Der Spiegel published Monday — its cover story titled “The Revolt of the Bundesbank” – in which he intensifies confrontation with ECB President Mario Draghi and the ECB Council.
Source: Bianco Research
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