BRUSSELS – Throughout the crisis period, the European Central Bank’s behavior has been conditioned by the tension between what it can do and what it is allowed to do.
The ECB is the only institution in the European Union that is able to provide unlimited funding to governments, but its governing statute prohibits government bailouts. Nonetheless, the ECB has provided large amounts of liquidity to the financial system, indirectly softening the pressure on government debt refinancing. For 18 months, it has been buying government bonds – worth more than €200 billion ($254 billion) – on secondary markets under its Securities Market Program. Moreover, it has provided loans to the banking sector, recently launching a three-year refinancing operation that generated demand from eurozone banks for €489 billion.
In his early December address to the European Parliament, ECB President Mario Draghi stressed his commitment to unlimited support of banks to avert the risk of a credit crunch. The wall of money unleashed by the ECB just before Christmas should be seen as a measure matching that commitment.
Draghi left it up to national banks to decide whether to use the liquidity to buy high-yield government bonds. French President Nicolas Sarkozy and France’s central bank (a member of the ECB) were less timid; they urged Italian and Spanish banks to buy their governments’ debt.