Promise From European Central Bank Is Also a Gamble
By promising to rev up the printing presses, the European Central Bank has created hope in the markets that Europe may finally start to overcome its economic challenges.
Yet the central bank is taking a big gamble in directing much of the stimulus at a complex securities market that for several years has been struggling to get back on its feet.
Mario Draghi, the president of the European Central Bank, said on Thursday that the bank would soon start to buy bonds that are backed by loans made to consumers and companies.
Many things have to come together for the plan to buy loan-backed bonds to work.
In essence, the program would try to get a vast lending pipeline that had fueled developed economies before the 2008 crisis flowing powerfully again.
Banks would sell large amounts of loan-backed bonds to the European Central Bank, or into a revived bond market, gaining cash that they could then use to make new loans.
The bond-buying plan could flop, however. It might, for instance, end up being too small to make a difference to Europe’s economy. Mr. Draghi said the details of the program would be announced early in October and the buying would begin then.
Whatever the central bank decides about the size, it will be partly limited by the relative smallness of Europe’s markets for loan-backed bonds.
Source: NYT
