Breaking Taboos Concerns Mount in Germany Over ECB Bond Buys


Axel Schmidt

Part 3: 'A Country Like Italy Can't Be Saved'

Even the bailout experts in Merkel's Chancellery are trying to allay worries among it supporters by noting that the ECB is only temporarily supposed to purchase sovereign bonds, until late September. On July 21, the heads of state and government of the euro-zone member states decided that the EFSF euro bailout fund would take over such responsibilities at that time.

But, until then, the ECB will be obliged to prop up the euro's value. The only problem with that is that everyone wants to get rid of the risky sovereign bonds from Spain and Italy, but hardly anybody wants to buy them. In other words, the ECB will be bleeding money for weeks.

Experts even fear the ECB might buy several hundred billion euros in Italian and Spanish bonds. If it took a similar proportion of bonds from those countries as it previously did from Greece, Ireland and Portugal, it would have to pay €300 billion.

A Risk of Inflation

In theory, the ECB can afford such sums, since it will be the one printing the money. And that's what makes this kind of intervention so attractive to many. As they see it, the ECB has unlimited firepower at its disposal to deter the markets from continuing to speculate against Spain and Italy.

In doing so, however, the ECB runs the risk of triggering inflation. What's more, there's some doubt as to whether the EFSF will be able to take responsibility from the ECB for purchasing sovereign bonds in September, as planned, because only limited means are at its disposal. At the moment, the amount of loans the EFSF can issue is capped at €440 billion. But a major portion of that has already been earmarked to help Greece, Portugal and Ireland. As a result, the bailout fund won't be able to afford to keep up for long the constant pace of purchasing that the markets have grown used to.

Given these circumstances, many political players believe an increase in the funds at the EFSF's disposal will be inevitable in order to impress the markets. This group includes European Commission President José Manuel Barroso, but even the French government has shown some sympathy for the idea.

Backers of the Barroso plan argue that this use of means will boost credibility. But the Germans don't agree. In their view, each time the EFSF's resources are increased, it sends a fresh invitation to the markets to test new boundaries.

Experts surrounding Finance Minister Schäuble suspect it would be almost impossible to win this kind of race with the markets, at least when it comes to Italy. As they see it, if the financial markets fail to recover their faith in Italy's government, even those in Berlin who favor a bailout would have nowhere else to turn.

As one official put it: "A country like Italy can't be saved."


Translated from the German by Josh Ward

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