Question about the ECB

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#1 Mon, Aug 22, 2011 - 10:41am
Joined: Jun 14, 2011

Question about the ECB

Howdy people, I was hoping a rookie could get some help here.

So I read today on ZeroHedge (€143-billion-insolvent-peripheral-debt-last-week-€111-billion-total) that the ECB has been buying government bonds again. How does that work? Do they print actual money which they use as payment and thus increase the monetary base?

What do they do with the bonds? Will the governments have to buy them back? Does the ECB then destroy that money?

The governments have to pay interest on the bonds, right? What does the ECB do with that money?

I guess this is the same for any central bank, but I just don't really understand how it works.

Edited by: Rogue on Nov 8, 2014 - 5:27am
Sun, Sep 4, 2011 - 9:41pm
Joined: Jun 14, 2011

The ECB doesn't need to print

The ECB doesn't need to print the money exactly as the Fed does, they just create an entry in the account of the banks from which they purchased those bonds. Theoretically the balance sheet of the ECB hasn't increased out of control like the FED because they perform some kind of sterilization/soaking (of liquidity) operations that I am not able to explain.

The ECB can hold those bonds until maturity, sell them in secondary markets at some point in the future, exactly like any other holder of bonds. When the ECB receives interests from those bonds it increases its assets and therefore the expansion of the balance sheet continues.

Note that there could be many details not completely accurate in my explanation, but as nobody replied, I think this is better than nothing, hope that it helps you!

Mike MALOney hater. Gingers DON'T have souls!