ROUBINI: The ECB Will Not Allow Spain And Italy To Game The Bailout

Nouriel Roubini

Photo: Bloomberg TV

NYU economist Nouriel Roubini was on Bloomberg TV this morning giving his thoughts on the ECB’s new bond-buying plan announced yesterday.One of the biggest concerns that the ECB itself has with implementing the new rescue program is that by only buying government debt with maturities of three years or less, Spain and Italy will be incentivized to only issue short-term debt.

However, Roubini said the ECB will tell Spain and Italy if they request bailouts that “this is a game you’re not going to be allowed to play.”

Roubini told Bloomberg TV:

The ECB is clearly concerned that with short rates now much lower than long rates, there will be a significant shortening of the maturity of the public debt, and that’s going to force then the ECB to keep on buying more of the bonds on the short end in the secondary market.

I think that because of that, the ECB is going to be quite strict about implicitly, if not explicitly, telling these countries, “If I buy your bonds, you cannot play the game of shortening the maturity in a way that effectively puts the burden on me to keep on buying it.”

I think there will be a clear understanding of that thing. Otherwise, you would be in a situation where first, the liquidity risk increases significantly – the rollover risk, if the debt becomes very much short term.

Two, that the ECB has to keep on buying more and more of the debt in the secondary market because most of the new issuance occurs on the short end of the yield curve.

The ECB cannot accept that, and it will be clear with Spain and Italy, “This is a game you’re not going to be allowed to play.”

Check out the full interview at Bloomberg TV >

MORE: Nomura’s Incredibly Bearish Take On Why The ECB Only Bought 3 Months At Most >

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