While some are celebrating Europe's latest bond-buying program for lessening risk and restoring investors’ confidence, others are more skeptical, arguing that once again European leaders are applying a patch while major problems persist.
The European Central Bank (ECB) introduced a program called Outright Monetary Transactions (OMTs), under which it is willing to purchase unlimited amounts of government bonds with one to three year maturities. These purchases will be sterilized, meaning the costs for the bonds will be neutralized by draining equivalent amounts of liquidity from elsewhere in the monetary system to prevent inflation.
Bloomberg quoted ECB President Mario Draghi as saying OMTs “will enable us to address severe distortions in government bond markets, which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro.”
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
“I see the trend as basically positive,” C. Fred Bergsten, a former U.S. Treasury assistant secretary for international affairs, told reporters during a conference call organized by the Council on Foreign Relations, CNNMoney reported.
“The doomsayers have told us time and again that the apocalypse is at hand, but it has not happened,” he added.
But others are not prepared to celebrate, saying there are several caveats that could hinder the success of the OMT program. Among them is the condition that countries must ask for aid to access it. But, those in need, such as Italy and Spain, have been largely resistant to do so.
Citing the need for leaders to overcome their political differences, former US Treasury Secretary Robert Rubin says, “I continue to think that they're behind the curve.”
“This will not get resolved until political leaders do what they need to do,” he added.
Furthermore, the ECB has forecast a deeper economic contraction for 2012 than it did three months ago, according to Bloomberg. And in 2013, the economy is expected to expand 0.5 percent instead of the 1 percent forecast in June.
Ben May, an economist at Capital Economics, told CNNMoney that the moves don’t address the region’s fundamental problems, such as a lack of economic competitiveness and weak growth in Spain and Italy.
“These problems can't be solved with loans or subsidizing government borrowing costs,” he said.
Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown
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