From Jefferies, the basic idea: Have the BoE just step in and buy the damn Italian bonds.
Unless part of a global coordinated solution to the problem, this may be unlikely to happen, but systematically the biggest risk facing the UK is events in EMU, as various Members of the BoE’s MPC keep reminding us (see the quote from a recent Mervyn King Speech below). Moreover, only
this week Deputy Governor Charlie Bean warned that apart from depressing household and business confidence, events EMU were leading to heightened funding difficulties for UK banks, which the BoE’s agents warned could restrict the flow of credit to the wider real economy. And, it should not be forgotten that many UK based long-only funds hold significant amounts of bonds of European governments. Lift the paper from those and more money may be deposited in UK banks and so
potentially reduce some of their funding difficulties.
A win-win situation, particularly if it caused the ECB et al to see sense and not just cut rates between meetings, but announce a programme to buy Italian and Spanish paper in size, in a very visible fashion? As we have continued to highlight the SMP (the current ECB and NCB bond buying programme) is arguably now contributing to a disorderly market. As the ECB and BoE’s own work on the Covered Bond purchases (EMU) and QE (UK) suggest, the important thing is for policy to be transparent, pre- announced and in size – everything that the SMP is not (although the SMP
is ending up being in size, as there remains no end in sight for the Eurosystem’s weekly purchases). By now, hopefully more of Europe’s leaders recognise what needs to happen. The issue is how bad do things need to get before they are forced into action?
This would probably work on an accounting basis, though we’re certain the blowback politically would be monstrous, especially given the existing hostility towards UK participation in any bailouts. But still, the point is valid.