The ECB meets again

Posted: Aug 20, 2012 10:20:23 AM

This week the ECB will be meeting to discuss plans to save the Euro Zone.  On the table, the ECB has proposed a cap on interest rates of debt issued by nations such as Spain.  The concept is the ECB will buy debt in a particular nation if the interest rates of that debt exceed the pre-set cap. In other words, if Spain’s 10 year bond rates go above 7%, the ECB will buy the bonds leaving Spain the ability to issue more debt.  This will allow countries like Spain to keep operating.  On the surface this might seem like a good idea because it protects bond buyers and limits interest rate carrying costs. However this is very short sighted as this is just another band aid and still does not fix the structural problem.  Unfortunately, the ECB does not have enough money to protect each country and the free market will eventually price this into the market.