Europe's central banker Trichet realizes that exiting previous EU debt positions is both politically and financially difficult

Jean-Claude Trichet has no idea what to do.  As the Central Banker for Europe, he is supposed to maintain independence.  But, he has used his independence to bailout Greece and Spain, buying bonds to lower yields on this sovereign debt. 

Now he has realized, what the Fed soon will.  Some of these positions are difficult to exit without taking big losses or upsetting markets even more.  Via Bloomberg

With the euro zone’s sovereign debt crisis now threatening to engulf Spain, its fourth-largest economy, investors are again looking for the President of the European Central Bank to do something to stop it, such as delaying the withdrawal of unlimited liquidity support for banks and significantly ramping up its bond purchases. The risk is that the ECB becomes a bail- out tool for politicians -- damaging its independence -- the very scenario Trichet wanted to avoid when he was pressed into the unprecedented step of buying government debt in May.

“To some extent the ECB is being held hostage by financial markets,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “As the existing measures are unlikely to be sufficient to solve the problems in the periphery, the ECB probably will be forced to increase its programs substantially.”

It would be “more than reasonable” for the ECB to buy Spanish government bonds, Efe newswire quoted Spanish Industry Minister Miguel Sebastian as saying yesterday. He said purchasing debt was “within the orthodoxy” of central banks and the Bank of England and Federal Reserve are following such a policy, Efe reported from Moscow.

Increasing its bond purchases, or resorting to outright quantitative easing by failing to sterilize them, would see the ECB take more risk onto its balance sheet and open itself to the charge it’s financing profligate nations.


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