AMERICAblog
Italy looks like it won't be able to meet the payments on its outstanding government bonds if interest rates on them rise much higher than 7% - and the shakier the government looks, the more people will dump the bonds, and thus the higher the interest rate will go. This is a clear case of a self fulfilling fear/prophecy (i.e., the more paranoid you are, the more afraid you should be that the feared outcome might just happen).
What is excruciating is the knowledge that stopping the run, and saving the Euro zone, would be easy and relatively costless. In fact, the European Central Bank (ECB) could probably make a profit. It may seem too easy, but all the ECB has to do is to say that they stand ready to buy any and all Italian government bonds. Doing this would immediately erase any fear bond holders have of not being paid, and it would stop the run to dump the bonds dead in its tracks because everyone knows the ECB can buy literally infinite amounts of bonds if it wants to.
Paradoxically, simply SAYING they stand ready to buy any and all Italian government bonds means that they likely won't actually have to DO it. If bond holders' fears are calmed then they won't want to sell the bonds and the ECB won't have to buy them .
This is exactly what the Federal Reserve does in the US for our own government bonds. and it is why the Treasury can borrow at extremely low interest rates. People are happy to have our bonds because they know the Fed stands behind them, so the Fed doesn't actually have to hoover them all up to prop up confidence. Why won't the ECB just do the same thing?
The short answer comes in two parts.
First is a misguided fear of inflation. If anybody can find any evidence of any inflation in any data from anywhere please send me a news flash. It just isn't there and won't be so long as we are in a recession. And if inflation ever does get going, we can easily squash it since with interest rates near zero there is plenty of room to raise them. I know, I know, the German bankers have a fear of inflation burned so deeply into their brainstems that they can't help themselves, but really, the 1920's hyperinflation that caused this attitude is almost a century ago by now, and Germany is supposed to be the central core of the Euro zone. So perhaps they can try to adapt just a bit to modern realities.
The second problem is a political one. The German electorate doesn't want to spend a penny to "bail out" what they see as free-spending Italians (or Spaniards or Portuguese for that matter). But their lack of faith is more a CAUSE of the Italians' problems than a reaction to it. If the Germans were WILLING to bail them out, then they wouldn't have to actually do it, as explained above. And if they did go ahead and buy some Italian government bonds to show they meant business, then they would be able to make a profit on them once it became clear that nobody needs to be afraid of a default.
What is excruciating is the knowledge that stopping the run, and saving the Euro zone, would be easy and relatively costless. In fact, the European Central Bank (ECB) could probably make a profit. It may seem too easy, but all the ECB has to do is to say that they stand ready to buy any and all Italian government bonds. Doing this would immediately erase any fear bond holders have of not being paid, and it would stop the run to dump the bonds dead in its tracks because everyone knows the ECB can buy literally infinite amounts of bonds if it wants to.
Paradoxically, simply SAYING they stand ready to buy any and all Italian government bonds means that they likely won't actually have to DO it. If bond holders' fears are calmed then they won't want to sell the bonds and the ECB won't have to buy them .
This is exactly what the Federal Reserve does in the US for our own government bonds. and it is why the Treasury can borrow at extremely low interest rates. People are happy to have our bonds because they know the Fed stands behind them, so the Fed doesn't actually have to hoover them all up to prop up confidence. Why won't the ECB just do the same thing?
The short answer comes in two parts.
First is a misguided fear of inflation. If anybody can find any evidence of any inflation in any data from anywhere please send me a news flash. It just isn't there and won't be so long as we are in a recession. And if inflation ever does get going, we can easily squash it since with interest rates near zero there is plenty of room to raise them. I know, I know, the German bankers have a fear of inflation burned so deeply into their brainstems that they can't help themselves, but really, the 1920's hyperinflation that caused this attitude is almost a century ago by now, and Germany is supposed to be the central core of the Euro zone. So perhaps they can try to adapt just a bit to modern realities.
The second problem is a political one. The German electorate doesn't want to spend a penny to "bail out" what they see as free-spending Italians (or Spaniards or Portuguese for that matter). But their lack of faith is more a CAUSE of the Italians' problems than a reaction to it. If the Germans were WILLING to bail them out, then they wouldn't have to actually do it, as explained above. And if they did go ahead and buy some Italian government bonds to show they meant business, then they would be able to make a profit on them once it became clear that nobody needs to be afraid of a default.
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