With the European debt crisis threatening to tear apart the very fabric of the EU itself, here's an idea (a weird one, I admit). Instead of buying Italian, Spanish, Greek, etc. government bonds, the ECB could sell the equivalent sovereign credit default swaps (CDS).
Greek CDS Soar
Yes, it means that the central bank will - in effect - guarantee the public debt of such nations, but it will do so only up to a defined limit (the amt. of CDS sold). The benefits, beyond the immediate de-escalation of the crisis, are:
- The ECB does not balloon its balance sheet.
- No money supply issues (no sterilization needed).
- Much bigger bang for the buck through the use of derivatives.
- The ECB receives income for the protection sold.
Mr. Stark's resignation yesterday from the ECB board makes it clear there is sharp disagreement within the eurozone itself on how to handle the debt crisis - fair enough. But this doesn't mean that things should be allowed to spin out of control. In such times markets are guided 99.9% by psychology (fear) and cannot be allowed to wreck the entire European socio-economic structure, put together over so many decades.