Last week, European Central Bank President Mario Draghi made a hasty pledge to ‘help revive inflation as soon as possible.’ And, of course, such a drastic movement more or less opened the floodgates to all sorts of financial stimulus prospects to the Eurozone.
So, perhaps that’s why the Organization for Economic Cooperation and Development is suggesting sovereign bonds as a way to give the central bank more assets to purchase.
Sovereign bonds are, as implied, bonds provided by a government. They’re typically denominated in the issuing government’s local currency, but they’re also commonly denominated and subsequently issued in foreign currencies. Given the nature of these bonds, it’s no wonder that various market observers are outright suggesting them as a potential asset for the ECB.
The Organization for Economic Cooperation and Development’s Chief Economist Catherine Mann recently released a statement that broke the suggestion this past Tuesday. She commented that ‘such asset-backed securities from the countries within the currency bloc, would allow the ECB to easily expand their asset purchasing prospects should they need to do so.’
Mann then went on to comment that ‘the main idea is to form a package of single sovereign bonds that are already issued,’ suggesting a diversification in bonds of sorts.
Other market watchers, including the Brooking Institution, expect the central bank to consider buying government debts. The speculation even sent debt yields in Italy and Spain this past Tuesday.
Although the idea is remarkable, some suggest that the prospect of the ECB buying government bonds would have to ‘essentially withstand a lot of legal troubles.’
But, that doesn’t mean the European Central Bank isn’t buying bonds to bolster their financial prospects. They’ve already bought covered bonds and private-asset backed ABS as a part of their intentions to expand their balance sheet by at least 1 trillion euros ($1.24 trillion).