ECB considers nuking Europe

[2046]

http://www.telegraph.co.uk/finance/economi...t-collapse.html

ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

[...]

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

[...]

The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.

But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.

[Jake_Ellison]

Germany was wrong to join a monetary union with countries with a history of irresponsible monetary policies like Greece, Spain or Italy, and now they'll pay for it. No matter what they do or don't do. When one of the countries responsible for sustaining the Euro is openly refusing to acknowledge the importance of remaining solvent (the way the Greek gov. clearly is, by making absurd claims about what they need and should be given to avoid bankruptcy), the Euro is not going to be sustained.

So they'll be hurt by that decision either way, but now Germany needs to find a way to gradually cut its ties with the countries which failed to honor the original agreements, of the Euro zone (to be fiscally responsible by stying under a 3% inflation rate for instance), not dig itself in even deeper. The EU should be reduced to a free trade zone.

[softwareNerd]

If the Germans rescue a countries that is on the brink, and is still unwilling to set their house in order, that country will likely need to be rescued again. If the Greeks want to be profligate, it ought to be between them and their creditors. So, either Greece stays on the Euro, defaults, and its creditors can build a credit-default premium into their interest rate. Or, much more realistically, Greece can go off the Euro and start a new Drachma, which they can then inflate, and their creditors can build in a inflation-premium into their interest rate.

Of course, some fraction of Greece's creditors might be German banks; so, that might make the Germans see things differently.

Within a nation, the central bank will always blink, as Paulson did. However, across countries things change. There may be strong national sentiment within Germany against helping Greece. I hope that Germany does not bail them out... ... fingers crossed!

Cutting Greece off might actually mean a stronger Euro, because it will signal that such countries will have to hold their own house in order. Even if Germany were to let Greece go and rescue the others (like Paulson letting Lehman go, and rescuing all other creditors), the Euro might remain strong.

Edited April 28, 2010 by softwareNerd

[Scott_Connery]

As I understand it, Greece cannot be kicked out of the EU. They have no real reason to leave either. They can either get Germany to bail them out, or default on their debts.