The European Central Bank has purchased €14.3 billion, or $20.5 billion, in government bonds last week in an attempt to soften the blow from the debt crisis that lingers over Italy and Spain. The ECB has yet to release information regarding which government bonds it had purchased.
A week earlier, the ECB bought €22 billion in bonds for Italy and Spain. The ECB has purchased roughly €110.5 billion in bonds since the launching of the Securities Markets Program in May 2010.
According to Berenberg Bank's senior economist Christian Schulz the ECB has bought Italian and Spanish bonds in excess of €36 billion since the initiative began. Currently, the ECB bond purchases average to around €3.6 billion a day. Analysts for the Royal Bank of Scotland estimate that at a rate of €2.5 billion a day, the ECB would have spent €600 billion a year on government bonds.
The German central bank said that ECB purchases have strained their motivation to pursue “appropriate financial policies.” Germany and other European nations have called for a firm ceiling of €440 billion for the bailout fund.
RBS Senior European Economist Nick Mathews thinks that the ECB and Euro zone rescue fund may eventually need to buy roughly half of all Italian and Spanish traded debt, which amounts to nearly €850 billion, or $1.2 trillion. Mathews believes that if there is any signal to investors that the central bank will only intervene temporarily, the market will act as if there were “a finite limit on purchases.”
Borrowing Rates Down
On the bright side, the purchases have already lowered borrowing rates, which were threatening Italy and Spain.
The money for the bond purchases was borrowed from commercial banks and thus did not fuel inflation through money creation. National parliaments will deliberate this fall on whether or not the Euro zone rescue fund should be allowed to take over bond purchases.
The ECB has stated that it fully expects to hand over the bought bonds after the rescue fund is given power. ECB President Jean-Claude Trichet has stated, however, that it can not “pre-commit” to any course of action.
Heads of Euro zone nations already agreed on July 21 to expand the bailout to allow for the ECB purchase of government bonds in the secondary market. Euro zone leaders have also given the ECB power to loan money to falling countries and recapitalize banks.
According to Economist Christian Schultz: “The operation continues to be successful at managing the yields on 10-year bonds for the two countries to a sustainable level of just below 5%.”
He continued on the importance of the bailout, stating “the initiative is the key tool to contain the contagion effect from the Greek crisis to other, larger countries of the euro area.”
Obama, Merkel Discuss Debt
German Chancellor Angela Merkel met with US President Barack Obama on August 27 to discuss the need for “concerted action” to help spur global economic growth and create jobs worldwide.
The joint statement did not address what measures will be taken by the two major economies. Obama is currently preparing his September speech, which will address both jobs and the deficit.
The US is also concerned that the Euro zone crisis will further prevent a US recovery and dampen any progress in the global economic arena. Federal Reserve Chairman Ben Bernanke reiterated on August 26 his confidence in European authorities to get a grip on the situation.
Bernanke also pushed for politicians in the US to stimulate growth through job creation and stimulating the housing market.
Key Statistics – Leading World Economies (source: International Monetary Fund)
- The world's leading economy, the United States, reported in 2010 a GDP exceeding $16 trillion.
- China, the rapidly growing second-largest economy, has a recorded GDP nearing $6 trillion.
- Japan, a close third-place contender, has a GDP of almost $5.5 trillion.
- Germany leads the European economy and is the fourth-largest economy with a $3.3 trillion GDP.
- France, Europe's second-largest economy, recorded a $2.5 trillion GDP last year.