RIO DE JANEIRO, BRAZIL – By buying government bonds of Italy, Spain, Portugal, and Greece, the ECB wants to prevent the euro crash. This is paid for with proceeds from maturing German, French and Dutch government bonds.
Interest rates on government bonds should be reasonably similar within the eurozone. However, significant differences have recently emerged between the countries, as risks have increased significantly, especially in the highly indebted southern periphery of the European Union.
Now, the European Central Bank (ECB) is attempting a daring maneuver to save the eurozone from disintegration and reduce the differences between the borrowing costs of eurozone countries.
#ECB balance sheet hit another ATH amidst record-high #inflation. Total assets rose by €8bn to €8,836bn shortly before the end of the bond purchase program. ECB balance sheet now equal to 82.5% of #Eurozone's GDP vs Fed's 36.6%, BoE's 39.6%, BoJ's 137%. pic.twitter.com/WSdz6fvgoo
— Holger Zschaepitz (@Schuldensuehner) June 28, 2022
As Reuters reports, the ECB will now start buying more government bonds from Italy, Spain, Portugal, and Greece. The money for this will come from maturing German, French, and Dutch government bonds.
The latter can still refinance relatively cheaply on the capital markets, while the notorious “PIGS” states (Remember the economic and financial crisis of 2008/2009? the same states still have the same problems today!) are already recording significantly higher interest rates.
🇪🇺 The central bank has divided the euro zone's 19 countries into three groups – donors, recipients and neutrals – based on the size and speed of a rise in their bond spreads in recent weeks. https://t.co/K6649z1Ku7
— Arkadiusz Balcerowski, CFA (@Insider_FX) June 30, 2022
The central bank has divided the 19 eurozone countries into three groups – donors, recipients, and neutrals – based on the size and speed of the rise in their bond spread in recent weeks, according to interviews with a half-dozen people at the ECB’s annual forum in Sintra, Portugal.
The spreads are measured against German bonds, which serve as the de facto benchmark for the common currency area.
The lists of donor and recipient countries, which are reviewed monthly, reflect the division into peripheral (insolvent) and central (solvent) countries that emerged at the time of the euro area’s first debt crisis a decade ago.
Recipients include a handful of countries considered riskier by investors because of their high public debt or low growth, such as Italy, Greece, Spain, and Portugal, the sources said.
Germany (along with France and the Netherlands) is expected to bail out the PIGS countries. Again.
The ECB keeps buying bonds, and keeps increasing lending to banks. Any questions? pic.twitter.com/HmxjnMA0cN
— Thorsten Polleit (@ThorstenPolleit) June 30, 2022
But there’s a catch: while the July and August repayments are substantial, the ECB knows that simply reinvesting the proceeds won’t be enough to reassure investors. So the central bank has accelerated work on a new tool that will allow it to make further purchases if a country meets certain conditions.
However, by doing so, the ECB is violating the restrictions on deficit financing and thus clearly violating eurozone rules. And there is likely to be an uproar at the latest during the next open sovereign debt crisis when the “donor countries” will also be confronted with significantly rising interest rates.
The ECB is currently undertaking a very reckless maneuver to save the eurozone, which could bring about the collapse of the common currency area in the worst scenario.