ECB Prepares to Intervene in the Debt Crisis

Tradervox.com (Dublin) – According to Jean-Claude Junker, the Luxembourg’s Prime Minister, the EFSC and the European Central Bank are preparing to make a coordinated move to reduce the borrowing costs in the region. Junker indicated this in an interview with one of the leading media houses and the comments are in line with the ones made by Mario Draghi, the ECB President; Angela Merkel, the German Chancellor; and Francoise Hollande the French President. The comments have been precipitated by the rising borrowing cost in Italy and Spain.

The European Central Bank has bought bond before in 2010 from Greece and in Summer of 2011 from Italy and Spain. The move was chosen over printing more money in a quantitative easing program. The quantitative easing program has been used by the Bank of England and Federal Reserve, but the ECB stopped the SMP program after it introduced the LTRO program.

Some of the steps investors are expecting the ECB to take include a reintroduction of bond buying program where they would make massive scale bond-purchases not seen before.  This move would have to be made without sterilizing the bond buys as there are fears of inability to drain out the funds, the ECB can also claim that the move is a measure to tackle the danger of deflation, which would then make this to fall under the Bank’s mandate.

Analysts have indicated that an unsterilized QE program would weaken the euro as the Central Bank would be pouring money into the markets. A weak euro would be good for Spain; however, analysts have warned that the QE program has been strong in the US but this is not the case in other places. There is a general feeling that printing more euro would increase the common currencies value hence beating the potential devaluation effect.

The European Central Bank would make this as the biggest move that has a potential to quell some of the problems facing the single-currency bloc, but there are some opposition from Germany and other members of the bloc. This is something the bank and the region leaders will have to deal with if the ECB is to implement something that will support Mario Draghi’s comments.

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