» Western Europe Insights: ECB Needs to Clarify Goals and Mechanisms Decision Economics

Western Europe Insights: ECB Needs to Clarify Goals and Mechanisms

Posted September 4, 2012 by rvillareal

Devil is in the Details: ECB Still Needs to Clarify Backstop Goals and Mechanisms

Highlights:

  • The ECB has made strides towards purchasing significant quantities of sovereign debt. However, the specific goals, mechanisms, and other details have not been fully clarified as yet.
  • Will the ECB subject itself to haircuts in any future debt restructuring? If not, by placing the burden solely on private investors, ECB actions may inadvertently raise yields in specific markets.
  • While the ECB will seemingly focus on the front-end of the yield curve, the question is exactly how short a maturity will be under consideration for purchase. Whether the purchases will be sterilized or unsterilized is still unknown.
  • Countries will have to agree to fiscal reforms when requesting bailout funds. Will these reforms reiterate previous austerity commitments or will they be more stringent?
  • Finally, will the ECB cap periphery yields or spreads? The ECB may continue to be vague on this issue for fear that markets will test the central bank’s resolve.
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