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Richard Cookson

ECB Plays Fast and Loose With the Law in Bond Plan

The central bank is intent on helping weaker borrowers in the euro zone, regardless of their abuse of debt and budget rules.

Law? What law?

Law? What law?

Photographer: Daniel Roland/AFP/Getty Images

When I wrote earlier this week that taming inflation in Europe and keeping spreads of peripheral borrowers low were mutually exclusive, I meant that they were mutually exclusive legally. But euro-zone countries and institutions have cavalier attitudes toward laws they find irksome, and the European Central Bank is no exception. Witness the announcement on Wednesday, less than a week after its rate-setting meeting, about what it seems to want to do to curtail the recent “unwarranted” rapid rise in spreads and yields of weaker sovereign borrowers in the euro zone. 

It would be hard to deny that the moves have been rapid. At one point this week, Italian bond yields were more than eight times what they had been at their lowest last year. On the warpath against what it calls “fragmentation,” the ECB said that because of lasting vulnerabilities from the Covid pandemic and to ensure smooth transmission of monetary policy, it would “temporarily” apply “flexibility” to the reinvestments of its vast portfolio of bonds when they mature. Translation: These will be directed at weaker rather than stronger borrowers.