Late this morning the markets seem to have sobered up a bit following earlier barely fettered optimism about a Der Spiegel article over the weekend.
It said: “The European Central Bank is considering setting limits on yields of euro area sovereign debt by pledging unlimited bond purchases” and that “the policy will be decided at the September meeting of the ECB’s governing council.”
For the person who managed to avoid all versions of this story over the weekend, here it is in German [you can use Google Translate if necessary.]
Yield limits would mean the central bank could intervene in the secondary markets when yields go above a certain level.
The inevitable parade of Bundesbank officials saying they’re not into the idea has also started
Bundesbank headquarters, Frankfurt Wikimedia Commons
Even without that, the realization was already spreading that implementing that idea would present obvious problems.
Here are the basic problems the ECB would face in trying to establish a yield/price target:
- impossible to determine exactly where such a fair level ought to be
- putting a number to such a level would leave ECB in a position where it would be required to explain how it arrived at such a number
- Potentially, ECB would need to explain why a number for one country might differ from that for another.
- If ECB sacked all the above off and did not set a yield target, it might have to follow a quantitative target
Even if quantity=“unlimited”: key questions would be:
- what assets will be eligible?
- how long the programme will be in place?
- How it will even be executed?
All this of course doesn’t even try to guess how effective any such intervention would be,
Remember the main objectives are:
- Raise the share of non-domestic funding/foreign exposure to Italy/Spain
- Repair monetary transmission; get credit flowing again, specifically demand.
So, we wait till the ECB’s next announcements on September 6.
Just remember that in recent years officials often [not always] find it difficult to provide a sufficient amount of detail in time to satisfy markets.