Earlier we wrote about how the crucial German faction inside the ECB may be coming around to agreeing to the idea of targeting bond yields of troubled countries in the eurozone, bailing them out by forcing their government funding costs lower.
Mohamed El-Erian, the CEO of PIMCO, the world’s biggest bond fund, doesn’t think that’s going to happen.
In an interview with CNBC, El-Erian said he and his team think it’s being discussed at a high level, but that it’s probably not going to happen:
We suspect – we do not know, we suspect – that this is one of the options – capping yields – that the ECB is looking at. We do not think it’s likely to materialise because it’s such an open-ended commitment.
Remember, an ECB can say, like they did for LTRO1 and LTRO2, we can intervene up to a certain amount on our balance sheet. The minute they target a yield level, they are saying basically it’s unlimited intervention. And we don’t think the ECB is there.
So, it is one of the options that the ECB is looking at, but we do not believe it is likely to materialise.
El-Erian said investors should be reminded of three big issues with ECB bond buying that won’t magically go away (although the second point may be mitigated):
Remember – that commitment [to buy bonds] has to be accompanied by first, conditionality. They have to be sure that the periphery is going to behave in a more responsible manner.
Secondly, it has to be agreed to by the creditor countries, especially Germany.
Thirdly, they have to deal with the subordination issue. Investors are worried about being subordinated by the ECB.
So, these are technically very complex issues, and that is why we think it is being discussed, but we don’t think they resolve this in the next couple of weeks.
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