Pimco gives welcome with caveats to ECB bond buying

Europe’s central bankers “crossed the Rubicon” by buying Spanish and Italian debt and brought “a much-needed and credible external balance sheet” to fight the eurozone debt crisis, but significant uncertainties remain around how to do the purchasing, says Pimco’s Andrew Balls.

The head of European portfolio management at the $1.3trn diversified asset manager said there is now the “potential for an end to the damaging games of chicken between the eurozone’s monetary and fiscal authorities, and therefore stabilizing the systemically important government bond markets.

“Using its balance sheet the ECB has the ability to stabilize the Italian and Spanish bond markets,” he said.

“The ‘too little too late’ approach and the open conflicts and disagreements including between the German government and the ECB meant that the crisis could not be contained.”

Yields on debt of the two countries, which had exceeded 6%, fell sharply as the ECB began soaking up debt last week.

However, Andrew Balls (pictured) said questions still surround the willingness of the governments in question to deliver controlled fiscal adjustment as part of the bargain.

Italy’s prime minister Silvio Berlusconi has announced an acceleration by one year of his country’s austerity measures.

But Balls said there also remained “huge uncertainty together with large technical and political execution risk” in weighing into debt of the bloc’s larger economies, and also doubts about the ECB’s continued willingness to do so in the longer term.

He noted buying sovereigns of Italy and Spain was a “legitimate case to promote more orderly markets”, as what was needed was a “truly credible firebreak” between the troubles of peripheral nations Greece, Ireland and Portugal, and more significant countries like Spain and Italy.

Balls expressed concern the ECB did not decide unanimously to wade into secondary markets, but added that Great Britain’s and America’s central banks are also being split at the moment over important policy decisions.

Balls said problems still remain with the design of the European Financial Stability Facility, which is conducting the bond buying, as it not “a joint and several liability of the eurozone members”.

Balls welcomed the fact Berlin and Paris had implicitly supported the expansion of the ECB’s debt buying activities. He added: “The G7 countries also provided backing, for what that is worth”.

Some onlookers might indeed question just what G7 backing is worth these days.

Of its members, the largest (the US) was recently downgraded. Japan, the next largest member by economy size, has worrying debt to GDP ratios and ageing demographics. Germany, third largest, is shouldering about 27% of the eurozone’s €440bn rescue fund buying debt of fellow member, Italy. The United Kingdom, next largest, has riots on its streets amid concern over its government’s looming austerity program. And France, says Balls, is “at risk of contamination” by the crisis surrounding the eurozone’s most beleaguered.

Canada has no immediately discernible faults.

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