ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse
April 28, 2010
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The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.
http://www.telegraph.co.uk/finance/economics/7640783/ECB-may-have-to-turn-to-nuclear-option-to-prevent-Southern-European-debt-collapse.html
By Ambrose Evans-Pritchard, International Business Editor
Published: 7:09PM BST 27 Apr 2010
[excerpt]
Greece’s fortunes were dealt yet another blow as Standard & Poor’s slashed its credit rating to junk status - BB+ - the first time that has happened to a euro member since the single currency was created, pushing yields on 10-year Greek bonds up to a record 9.73pc.
The credit-rating agency also cut Portugal’s sovereign debt ratings by two notches to A-, as the swirling storm hit the country with full-force.
“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.
“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”
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.
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