Many market participants believe that in order for the European financial crisis to not spiral into a chaotic economic collapse the European Central Bank must signal a willingness to buy a near limitless amount of government bonds. That arguably will provide private investors with confidence that a floor to the massive problems exists, emboldening them to purchase European government debt and other risky assets.
Fitch echoed this sentiment when it lowered France’s credit outlook this week:
“Of particular concern is the absence of a credible financial backstop. This requires more active and explicit commitment from the ECB.”
But many market participants also believe that the the ECB and other European policy members will ultimately do the right thing once austerity measures are solidified and when a financial emergency emerges. That is the the bet. That is why equity markets and bond markets have held up decently well despite an extremely concerning environment.
It’s hard to figure out the ECB’s real thinking, but I was struck by some comments made this week.
Look at what ECB President Mario Draghi noted, which was picked up by the WSJ:
The ECB’s purchases of government bonds are “neither eternal, nor infinite,” Mr. Draghi said in a speech in Berlin, stressing it would take “a lot” more than monetary-policy measures to restore market confidence in the euro zone.
Asked whether the ECB should copy the U.K. and U.S. in printing money to buy government bonds, a policy known as quantitative easing, Mr. Draghi said: “I don’t see any evidence that quantitative easing leads to stellar economic performance” in those economies. EU treaties forbid monetary financing of government debt, he added.
And the WSJ further reports these comments this week from German Bundesbank president and ECB governing council member Jens Weidmann:
The idea that the ECB should turn on the printing presses to help finance some debt-ridden euro-zone states should be put to rest for good, Mr. Weidmann said. Central bank “independence is lost when monetary policy is tied to the wagon of fiscal policy and then loses control over prices,” he said.
It certainly is possible that the ECB is simply posturing in order to force European countries to get their financial act in order, but it is also possible that the ECB truly has no intention to provide a massive backstop to this crisis under any scenario. A very scary thought.
Alan
