"Spreads on public debts in the Eurozone – with the exception of Greece – are falling hard and fast. This column argues that this is in large part because the ECB is now effectively guaranteeing Eurozone government debts. But it cautions that in doing so, the central bank is taking enormous risks.
With immense modesty, the President of the ECB Mario Draghi is giving the credit for falling spreads on Eurozone government debt to the courageous reforms announced in a number of countries, especially those where former academic economists act as prime ministers. Oh, how we would love to buy Mario Draghi’s interpretation! While simultaneity is not causality, it is hard not to see a link between the impressive decline in bond spreads and the ECB’s long-term refinancing operations (LTROs).
The story is that banks borrow from the ECB at very low rates (about 1%) and buy public bonds whose yields are much higher. The amounts are considerable – by the end of December LTROs had injected €250 billion of fresh cash. Rumours are that the next round will see an injection many times that amount. When one realises that the total lending capacity of the EFSF is €250 billion, it is not difficult to see why the LTROs have turned around market sentiment..."
at http://www.voxeu.org/index.php?q=node/7617
With immense modesty, the President of the ECB Mario Draghi is giving the credit for falling spreads on Eurozone government debt to the courageous reforms announced in a number of countries, especially those where former academic economists act as prime ministers. Oh, how we would love to buy Mario Draghi’s interpretation! While simultaneity is not causality, it is hard not to see a link between the impressive decline in bond spreads and the ECB’s long-term refinancing operations (LTROs).
The story is that banks borrow from the ECB at very low rates (about 1%) and buy public bonds whose yields are much higher. The amounts are considerable – by the end of December LTROs had injected €250 billion of fresh cash. Rumours are that the next round will see an injection many times that amount. When one realises that the total lending capacity of the EFSF is €250 billion, it is not difficult to see why the LTROs have turned around market sentiment..."
at http://www.voxeu.org/index.php?q=node/7617
