Willem Buiter, Citigroup's chief economist and former BOE policy maker, told reporters in London today that "the ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday. If the ECB doesn’t come in, the Italian bond auction is likely to fail. What we’re going to have is the ECB are going to be doing the heavy lifting." To anyone who watched the sharp move in Italian sovereigns, so reminiscent of central bank FX intervention overnight, Buiter's conclusion is all too obvious. As we reported, there were extensive rumors, and certainly validated by trading activity, that either the ECB or the PBOC or both, intervened in the Italian bond market to make sure today's Bill auction priced, which it did, but absent the reinforcement of the central banks could have very likely failed. What is amusing is that it was just last week that reporters were querying Trichet why the ECB's SMP bond purchasing operation had been all but abandoned. Well, here's your answer: JCT was simply preserving his dry powder for all the upcoming contagion casualties, such as Italy first, then everyone else.
The ECB said yesterday it refrained from buying government debt for a 15th week after the purchase program issued 74 billion euros ($103 billion) of liquidity in the last 14 months. Italy sells a series of bonds on July 14 with maturities ranging from 2016 to 2026 at a time when investors are pushing up its bond yields amid concern Europe’s debt crisis is spreading.
The Frankfurt-based bank may try to get greater guarantees for the debt it buys and will seek to extract “a pound of flesh” from governments by using the purchases to demand they impose greater austerity and avoid steps that could spur credit rating companies to declare a nation is in selective default, he said.
October’s retirement of President Jean-Claude Trichet may make the ECB less dogmatic in its aversion to so-called selective defaults and credit events, Buiter said.
Trichet’s past leadership of the Paris Club, which oversees debt restructurings, likely makes “intolerable” to him the idea that a default could occur on his watch in Europe and successor Mario Draghi will be more pragmatic, he said.
It is unclear what the role of the PBOC will be in all of this. We venture to guess that it will be just as supportive to protect the value of its strategic European investments.