Thursday, July 7, 2011

Trichet ECB Will Buy Portugese Debt

European Central Bank President Jean-Claude Trichet at a press conference held, following the announcement that said the bank would hike its interest rate, that it will suspend the application of the minimum credit rating to debt instruments by the Portuguese government.

Translation the ECB will buy any Portuguese junk debt thrown at it. The ECB has cash on its balance sheet to pull this off for the time being. The question remains whether the bank prints money to bailout the PIIGS once it runs out of cash on hand. The ECB and the 17 euro banks only have 1.9 trillion euros on hand. This may sound like a lot, but given that Italy is on the edge of crisis and it alone has debt of  nearly 2 trillion, without money printing the ECB will be unable to bailout all the PIIGS.


  1. Is that €1.9 trillion new money? Will it cause price inflation when they tap into those reserves?

  2. Astonishing. They are really just making it up as they go along, aren't they?

    What do you think the consequences will be, Bob? Will the ECB just print more money to buy the junk debt? Why have ratings agencies if their ratings are ignored?

  3. @Dale, no, they knew what they were going to do from the begginning. They just keep liying and changing their version so people dont get angry.

  4. Though the Eurosystem indeed has 1.9 trillion Euros in assets, practically speaking, their additional bond purchasing capacity is only just over 300 billion Euros. Here is the balance sheet:

    Operationally, the prior PIIGS bond purchases pursuant to the stabilization programs have been accounted for on the Asset side as Item 7.1, Securities held for monetary policy purposes. As of July 1, 2011, they were 134.4 billion Euros. Other Securities at 7.2 started increasing in April 2010 as well, so there may be bonds stuffed in there (net 50 billion Euros increase to date).

    Sterilization has been achieved by not rolling over longer term refinancing operations at item 5.2. This is down to 313.2 billion Euros. The Main refinancing operations line item is used to manage short term rates, so it is not really a cushion with respect to sterilization of bond purchases.

    Conceivably, the National Central Banks comprising the Eurosystem could sell assets to purchase bonds, such as their 363.3 billion Euros in gold. I highly doubt that will happen and there appears to be little wiggle room elsewhere.

    So, about $300 billion Euros before the ECB is officially "printing money". That's it.