Simon Nixon argues that only the IMF can do any thing about it

The same problem applies to bond purchases by the European Central Bank, widely touted as the solution to the problem. The ECB can only buy bonds in the secondary market. There is no guarantee that any amount of bond buying in the secondary market will ensure Italy has access to the primary market. In fact, banks and other investors may see increased ECB bond buying as a further reason to exit as the ECB insists on being treated as a preferred creditor: the message from Greece was that the bigger the ECB’s exposure, the bigger the private sector haircut if the debt proves unsustainable.

That suggests the only really viable source of liquidity, at least in the short-term, is the International Monetary Fund.

There is the absolute guarantee that unlimited buying in the secondary market will ensure Italy access to the primary market.

The question is whether limited bond buying in the secondary market will ensure Italy access to the primary market. There is no particular reason to believe this and Nixon’s logic holds.

Then the question is how to secure an unlimited commitment within the confines of the Lisbon Treay and Eurosystem Policy. The particular hurdles are

Lisbon: Article 101(1)

The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which:

(a) directly or indirectly fix purchase or selling prices or any other trading conditions;

Eurosytem: 6.2 Eligibility specifications for underlying assets

The ECB establishes, maintains and publishes a list of eligible marketable assets

3 The Eurosystem  shall only provide counterparties with advice regarding eligibility as Eurosystem collateral if already  issued marketable assets or outstanding non-marketable assets are submitted to the Eurosystem as collateral. There shall thus be no pre-issuance advice

The first provision says that the ECB cannot target a price for Italian Debt on the secondary market.

The second provision says that ECB cannot guarantee that newly issued Italian debt will stand as collateral under repurchase agreements.

If the ECB were able to do either of the above things then it could provide guaranteed liquidity to the holders of Italian debt and cause the yield to collapse towards the overnight rate.

Given that this is not an option. What is?

The first is the creation of a Single Charter Bank by the EU. That is, a bank that exists only for this purpose. Infuse the bank with high levels of liquidity, restrict it to the purchase of Sovereign debt and then let it through profit maximization arbitrage down the yield on any all Sovereign debt that it chooses.

The second is to go a Fed speak route. The ECB could announce that

Speculative selling of Sovereign Debt unfounded by fundamentals has the potential to disrupt the operation of the Eurozone financial system and endangers the stability of Euro.

To ensure the stability of the euro the ECB reserves the right to offset any speculative attacks on member nation Sovereign Debt through Structural Operations.

Essentially, what you are saying here is that you recognize the dual equilibrium nature of Sovereign Debt. This nature makes Sovereign debt vulnerable to speculative selling. That is, the more market participants push down the value of Sovereign debt the more likely it is that Sovereign debt will be drawn towards the default equilibrium.

Default by a major Eurozone country would endanger the euro and lead to a sharp fall in the Euro in international markets. This in turn would drive up the price of imports to Eurozone countries.

Thus the goal of price stability demands that ECB conduct Structural Operations to prevent speculative selling from drawing a Sovereign towards a default equilibrium.

This allows open ended bond buying without bond price targeting.

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