Wednesday, August 24, 2011

Crisis escalated (and managed) by ECB

I came across a blog (link) where Rebecca Wilder pointed out that hiking of interest rates in Europe has worsen the crisis in Europe. Take a look at this graph.

ECB (European Central Bank) has risen interest rates twice this year. In both cases the yields of 10-year government bonds of the most problematic countries (Yes, Belgium is not one of the hawks) has risen considerably. This means that these countries have to pay much bigger interest costs on their debt thus worsening situation with their budgets.

Now ECB has started buying government bonds of Italy and Spain in additon to Greek, Portuguese and Irish bonds. ECB now holds more than 100 billion of debt of these countries. While the ECB is terrified of inflation (reason for hiking interest rates) their colleagues from USA have speculated that inflation might be temporary. Maybe that's what ECB should do now - lower the interest rates so the euro would weaken supporting export and possibly lowering yields of problematic countries as well. Of course, maybe the ECB knows something we don't. Or maybe Jean-Claude Trichet (president of ECB) is busy buying all the bonds. We will know more maybe even on Friday when the ECB publishes their opinion on monetary developments in Europe. If not then, we will here more on the 8th of September when the Governing Council will meet in Frankfurt to discuss economic environment in the eurozone.

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