The European Central Bank (ECB) has no choice but to directly buy government bonds if it wants to end the crisis, as its recent liquidity injections are falling short, says Pierre Lagrange, co-founder of investment manager GLG and founder of MAN Asia.
To fight a credit crunch in Europe, the ECB has made easy low-cost loans available to banks, a liquidity-injecting measure known as a long-term refinancing operation.
"Giving the money to the banks to help is massively important because otherwise we would end up with a problem at one of the big banks," Lagrange tells CNBC.
The problem is yields on government debt continue spiking at auction in Spain and elsewhere in Europe, a sign investors remain nervous over southern Europe's ability to finance itself, which keeps the debt crisis alive and well and offsets attractive financing made available to banks.
"You’re back to square one and the central bank will have to do something," Lagrange says.
“If you let the debt spiral, then you really are destroying what you just fixed. So we now need the ECB to do something else and the central bankers are nearly the only ones who can do something because the governments are all facing elections and trouble."
Some ECB members says they favor directly buying bonds from banks, a monetary tool known as quantitative easing, while others oppose the move on the argument that doing so would push up inflation rates and violated the bank's mandate.
Governments need to do more to foster growth and cut spending, European monetary policy officials say.
"You cannot solve structural problems in the economy with instruments of monetary policy," Bundesbank President Jens Weidmann said recently, according to Reuters.
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