ECB Looking To Do Some Major Interventions To Aid The Euro Zone

Everyone is hanging onto their seats awaiting the outcome of some major financial catalysts in the Euro Zone.  The ECB is standing by ready to act as soon as some decisions are reached amount Euro zone leaders.  The ECB will not take steps forward to ease the financial situation until Spain officially asks for bailout assistance, Euro Zone leaders agree to joint euro bonds, or debt sharing, and if/when the German court ruling on September 12, deems the European Stability Mechanism Constitutional.  Until those things fall into place the ECB is at a stand still.  However, the markets have responded positively to some very determined comments by Mario Draghi, ECB president to “do what it takes to preserve the Euro.  Draghi created the expectation that the ECB would resuem buying sovereign bonds as Spain and Italy’s borrowing credit reach unsustainable levels.

Germany Opposes Bond Purchasing As An Intervention To Save The Euro

Draghi is coming up against the German Bundes bank who responded negatively to the proposal to buy up sovereign bonds, saying it would take the pressure off indebted nations for budget reform.  Bundesbank President Jen Weidmann commented in a recent Reuters interview:  “The mechanism of bond purchases is problematic because it sets the wrong incentives.”  Germany would like to see the indebted southern euro regions crack down on spending and raise taxes in an effort to resolve the financial problems.  Simply helping share their debt load, puts a Band-Aid on an existing problem but does not offer long-term solutions.

Quantitative Easing:  The Next Major Move By The ECB To Save The Euro

The ECB is prepared to offer even more dramatic aid to preserve the Euro, but implementing quantitative easing in the Euro Zone.  Previously, the ECB had a policy that for each Euro that enters circulation, another one was withdrawn by taking in interest bearing deposits from banks.  This was a sterilization effort in place to prevent inflation.  If the ECB were to buy debt across the euro zone, it would eliminate the issue of the ECB financing specific euro governments, but it would create a new set of problems by inflating the Euro.

Either scenario means there are some hard knocks ahead for the euro.  Whether the ECB is successful in buying up government bonds, or in implementing QE, the euro is in for a rocky ride. When one part of the world is struggling, the aftershock is felt throughout the world and is reflected in the markets and other investments.  As an investor it would be wise to make sure your wealth is properly allocated for the economic times ahead. For more information on investments that are likely to perform in spite of the squeeze of the Euro and other economic circumstances, visit redmoneyupdate.com/barney

http://www.reuters.com/article/2012/07/30/us-ecb-options-idUSBRE86T0OC20120730