The European leaders and beuarocrats are scrambling to find a solution for Greece towards the summit on Thursday, and to stop the raging contagion in Spain in Italy. There are many options, many constraints, and confusion is growing.
Sending Trichet to the printing presses could could stop contagion in the short run,and enable growth and pass quite easily, with everybody, except the ECB. Here are 5 arguments for this solution:
- Lower yields: Buying bonds will immediately lower bond yields. This will eventually let the bailed out countries a return to the markets faster than expected, and lower funding costs for Spain and Italy. A fresh bond auction in Spain already cost authorities too much – a result of the current mess.
- Growth: Buying yields by enlarging the balance sheet of the ECB means printing euros. In turn, this means a lower euro, making exports more attractive, allowing more growth. The idea of the bailout plans is to allow the troubled countries time to fix their balances, to grow and then return to the markets. Growth is the last thing that is seen from these austerity measures. Without growth, the vicious cycle continues. With growth, normalization can be seen in the horizon.
- Firm action: A dramatic move of bond buying will not only lower the yields, but also show that significant action is taken to resolve the situation. Strong action in the US at the height of the crisis at 2008 helped calm the markets. This determination is currently missing in confused Europe.
- No new bailout: The citizens in the rich northern countries can’t stand anymore bailouts. They were ready to help, but not again, and not again to the same country: Greece. Printing money by the ECB means no more taxpayer money. In any case, the current bailout isn’t sufficient for containing Spain. Needless to say, it cannot contain Italy.
- No changes to existing treaties: Other suggestions, such as a buy back program by Greece, also known as the “transfer union” suggestion are not only highly unpopular, but require a change in existing treaties, and this is very complicated at the moment.
- No default: After the collapse of Lehman Brothers, everybody is afraid of a bankruptcy / default. A triggering of CDS, contagion effects and troubles in banks are feared of, as nobody knows how this can end. Avoiding a default, a selective default, a temporary default and a credit event will make markets more calms. And also ECB president Jean-Claude Trichet strictly opposes it.
Now, Trichet did buy bonds of peripheral countries when he was forced to, from May 2010. The moves were very limited, and they were also sterilized, meaning that the money was drained out of the markets.
And in the past 16 weeks, the European Central Bank stopped buying bonds. Their tough stance came as the talks of a Greek default intensified.
It is time to bend the arm of the ECB. A dramatic buying of bonds can make a difference quickly, before Spain and Italy are downgraded and lose access to the markets. If this happens, the current uphill struggle will turn into an impossible task.
Further reading, about another thing the ECB can do: Lower the interest rates now.Get the 5 most predictable currency pairs