In a move ECB President Jean-Claude Trichet says is NOT Quantitative Easing, ECB Delays Exit of Emergency Measures, Buys Bonds to Fight ‘Acute’ Tensions

The European Central Bank delayed its withdrawal of emergency liquidity measures and bought more government bonds as President Jean-Claude Trichet pledged to fight “acute” financial market tensions.

Trichet said the ECB will keep offering banks as much cash as they want through the first quarter over periods of up to three months at a fixed interest rate. As he spoke, ECB staff embarked upon a new wave of purchases, triggering a surge in Irish and Portuguese bonds.

“Uncertainty is elevated,” Trichet told reporters after the ECB’s Governing Council left its benchmark interest rate at 1 percent today. “We have tensions and we have to take them into account.”

Bond purchases will continue to be offset to keep the money supply unchanged, in contrast to the Federal Reserve and the Bank of England, he said. “It’s not quantitative easing, we’re withdrawing all the liquidity,” he said.

President Axel Weber, a leading contender to replace Trichet at the bank’s helm next year, opposed the decision to start buying bonds in May and has since called for the program to be cancelled. He says it poses “stability risks” and that there is no evidence it works.

Move Will Fail

I don’t know when this move fails, it could be a day or week, but fail it will, just as all the other ECB moves have failed.

Loading up the central bank’s balance sheet is a risky move because it does not address the core issue that Ireland, Portugal, Greece, and Spain cannot possibly pay back all that is owed.

Take the Money and Buy Gold

If Ireland wants to get creative, it should take Trichet up on the offer right now for “unlimited cash” at 1%, and put the whole shebang on gold.

In a few of months when the payment is due, Ireland can tell the ECB that it will keep the gold to start a new gold-backed currency and the ECB can keep the IOUs. That would get the ECB and IMF talking about haircuts in short order.

Mike “Mish” Shedlock
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