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European Central Bank given unlimited option to spend depositors' money on worthless bonds

Sep 06, 2012


FRANKFURT, Sept 6 (Reuters) - The European Central Bank  agreed to launch a new and potentially unlimited bond-buying programme to lower struggling euro zone countries' borrowing  costs and draw a line under the debt crisis, ECB President Mario  Draghi said on Thursday....

In another potential sop to the Bundesbank, Draghi said all  bond purchases would be "sterilised" by taking in an equivalent  amount in deposits from banks to avoid any risk of inflation.

The banks won. They have been holding potentially worthless bonds (in case of default). Now the European Central Bank has taken the risk out of buying those bonds. If the country is close to default, the banks can just sell their bonds to the ECB. But if their bonds reach maturity without a default, the banks get to make good profits on them.

Of course, the ECB will be spending bank deposits to buy those bonds. I'm glad that I have no money in those banks. If enough depositors are forced to buy those bonds, the bonds themselves will retain their value. Essentially, they are creating a market for the bonds in order to give them artificial value.


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Dr. Stephen Jones

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