We have a mandate and we have to stick to our mandate. Fixing an interest rate for a country is certainly not compatible with our mandate. You would guarantee a certain refinancing cost for a government and you could not argue that this was not monetary financing.
The stated purpose of the SMP is to cope with dysfunctional markets and it’s not to ensure a specific spread for a specific country.
That’s Bundesbank President Jens Weidmann in his FT interview, confirming that, well, the ECB is not here to save the world. Or at least the ECB will not be seen to contravene Article 123 of the EU Treaty in doing so!
In particular, Weidmann squishes any talk of the central bank rejigging its buying of sovereign debt to include a specific yield target (say below 6 per cent for Italian debt), or a specific spread to AAA sovereigns, or a specific bond price.
This is actually a bit curious when you think about Bundesbankers being terrified of monetary financing. Under the current regime of buying bonds, the ECB is dragged into the market whenever bonds get sold off, and it needs to fix a broken yield curve, and so on. (The ECB clearly did this last week to stop 2-year Italian bond yields from rising above 10-year yields.) The funny thing is, there’s nothing that stops the ECB having to buy up a lot of a government’s debt even if done in dribs and drabs like this. Over time, it builds up — and the ECB can’t control the pace. It may not be monetary financing in principle, but it’s going to have the actual effect that the Bundesbank is worried about.
Quite probably, the current approach will have more of an effect on actual increased ECB holdings of sovereign debt than if they just did a target. It’s like the Swiss National Bank — no one is really prepared to press them on their EURCHF 1.20 exchange rate target because they know it’s there, and that the SNB would bring its firepower forward to back it. In the event, little has been spent on intervention for the target.
Maybe we should outsource eurozone bond-buying to the SNB?
Anyway, there are other attractions to a target, as outlined below by economist Gabriel Sterne at Exotix. He suggests that the ECB publishes a list of “floor” levels at which it is prepared to buy unlimited about of bonds. This floor will be significantly below current market prices and be set by way of an objective assessment of the debt sustainability of the country in question. Benefits include:
It provides the possibility of a balance sheet upside for the ECB (and more importantly EA taxpayers).
Rather than intervening when markets are tanking, the ECB could potentially capture some gains with this approach. This goes down particularly well with taxpayers who are funding the whole enterprise.
The policy is credible.
FT Alphaville hears that this is a key ingredient to decisive-action political brew that actually turns the downward markets death spiral tide. The credibility in this approach comes from the fact that it acknowledges the downside upfront by setting the floor below the current market price. Intervening above the floor, after all, is “fruitless”.
We think there is a much improved chance the representatives of concerned taxpayers would accept it.
Taxpayers (i.e. voters) are more likely to except a policy that has the potential for upside, rather that a collection of scenarios of baseline, bad, worse, and armageddon.
It takes policymakers away from EFSF-related distractions.
It’s like a CDS. It’s not like a CDS. The EFSF will decide when it should make payouts. There’s a SPV. But no one wants to invest. It’s like a CDO. Or a CDO squared. France might lose its triple-A rating, taking the EFSF’s triple-A with. It bought its own bonds. It didn’t buy its own bonds.
Give it up already!!
Thanks.
If implemented skilfully, it takes care of the sovereign’s solvency problem, allowing other institutions, to focus on the sovereign’s liquidity problems and the banking sector’s recapitalisation needs.
IMF deals with new financing needs and the EFSF takes it up with the banks. Divide and conquer.
There would be greater discovery of the price of sovereign bonds unfettered by official sector intervention at prices above the market rate.
FT Alphaville isn’t sure if that counts as more or less political risk, but at least the markets would know a bit more about what’s going on. Certainty and credibility. The two C’s if you will. Bring it!
By Joseph Cotterill and Lisa Pollack
Related links:
You shall not default, the ECB commands it – FT Alphaville
While everyone is obsessed with sterilisation in Europe…- FT Alphaville