Why The ECB Can't Rescue Europe

ECB, european central bank

Photo: flickr / jurjen_nl

With borrowing costs rapidly escalating not only in Italy but also in Spain and France, analysts are chattering about whether or not the European Central Bank can and will step in to save the euro.WSJ’s Simon Nixon says don’t count on it, for three reasons. We’ve heard these before:

1) The ECB has no mandate to be the lender of last resort. President Mario Draghi has confirmed this.

2) Becoming the lender of last resort would make the bank vulnerable to moral hazard and compromise its independence.

3) In buying more debt, the ECB would take on huge risks which it may not be able to support without access to tax revenues.

However, Nixon goes a step further, refuting those who believe that a massive escalation of bond-buying in the secondary markets could stem the pressure on borrowing:

Even if the ECB offered to buy unlimited bonds in the secondary markets, Italy might still struggle to raise money in the primary market. The ECB could find its exposure to Italy expanding rapidly—it also is providing lender-of-last-resort funding to Italy’s banks—while the core problem of unsustainable borrowing costs remains.

Thus, we return to the reality everyone no one wants to settle for—the ECB will only play the part of “saviour of Europe” if EU leaders agree to significantly change its mandate.

Read the entirety of his excellent analysis here (via @aussietorres).

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.