ECB bond-buying: 10 essential terms

European Central Bank president Mario Draghi is expected to announce the details of a bond-buying programme
The European Central Bank ECB in Frankfurt, central Germany.

In ORANGE Collocations & Expressions

European Central Bank ECB in Frankfurt, central Germany. Photograph: Michael Probst /AP

European Central Bank president Mario Draghi is expected to announce the details of a bond-buying programme to help keep down borrowing costs of crisis-hit countries later on Thursday. Leaks suggest it will involve unlimited purchases of government debt that will be “sterilised” to assuage concerns about printing money.
The bond-buying scheme is rumoured to be called the “outright monetary transactions”, with a shorthand title of OMT.

Maturity

The life of a bond, at the end of which it will be repaid in full. A bond’s maturity can be as short as a year to as long as 100 years.

Seniority

This refers to how likely you are to be repaid if a bond issuer goes bankrupt. Bondholders with seniority over others will be paid back before other bondholders. There was some concern that the ECB would demand seniority over other bondholders when it undertook the bond-buying scheme, but leaks now suggest otherwise.

Unanimity

Was the ECB governing council united in backing Thursday’s decision, or was there opposition? Bundesbank head Jens Weidmann has spoken out against a bond-buying programme before – is he now onside? Was the ECB split over interest rate levels, or were the decisions unanimous? Draghi’s answer to these questions (which will surely come up) could be crucial.

Pari passu

A Latin phrase meaning “equal footing”. In the bond markets, this means bondholders will be treated the same if a bond issuer goes bankrupt. Any purchases the ECB makes as part of its bond-buying programme are expected to be pari passu with other bondholders.

Collateral requirements

The ECB asks banks for collateral in return for taking out cheap loans. If they relax collateral requirements, they can accept a wider range of assets as collateral from banks. They have already relaxed these requirements, and can now accept everything from bundles of car loans to mortgage-backed securities.

Conditionality

This is the way the ECB would keep the Germans happy, by imposing conditions on receiving assistance from the ECB; so, if the ECB helps keep a country’s borrowing costs low by buying up its bonds, that country may have to agree to some strict austerity. Without conditionality it would be easier for the ECB to unilaterally intervene.

Convertibility risk

This refers to the risk that you will buy bonds denominated in euros but could ultimately be paid back in lire or drachma (or deutschmarks) if the country taking out the debt leaves the eurozone before the end of the bond’s life.

Unlimited intervention

Exactly what it says on the tin. Expectations are that the ECB will not put a limit on its bond buying. This is seen to be an improvement on the previous bond-buying programme, which was limited in size and therefore lacked credibility in the markets. If other traders do not believe the ECB has the firepower (or inclination) to buy enough bonds to bring down yields, they may continue to bet on them rising.

Sterilisation

This makes sure the money supply does not increase as a result of the bond-buying programme. When the ECB buys bonds, it is injecting liquidity into the financial system, effectively creating new money. To counteract that, the ECB has in the past followed bond purchases by subsequently draining an equal amount of liquidity from the system. It does this at the weekly deposit tender by increasing the rates it will pay commercial banks to deposit money with the ECB. The idea is that this will encourage banks to deposit more money with the ECB, thereby taking it out of the system.

Yield cap

Rumour had it that the ECB would set a yield cap on certain countries’ government bonds. This would mean if the yield looked like it would break through that level, the ECB would start buying bonds to push prices higher and bring yields back dow

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The Austerity Debacle

Op-Ed Columnist

The Austerity Debacle

By

Published: January 29, 2012
Last week the National Institute of Economic and Social Research, a British think tank, released a startling chart comparing the current slump with past recessions and recoveries. It turns out that by one important measure — changes in real G.D.P. since the recession began — Britain is doing worse this time than it did during the Great Depression. Four years into the Depression, British G.D.P. had regained its previous peak; four years after the Great Recession began, Britain is nowhere close to regaining its lost ground.
Fred R. Conrad/The New York Times
Paul Krugman

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Nor is Britain unique. Italy is also doing worse than it did in the 1930s — and with Spain clearly headed for a double-dip recession, that makes three of Europe’s big five economies members of the worse-than club. Yes, there are some caveats and complications. But this nonetheless represents a stunning failure of policy.
And it’s a failure, in particular, of the austerity doctrine that has dominated elite policy discussion both in Europe and, to a large extent, in the United States for the past two years.
O.K., about those caveats: On one side, British unemployment was much higher in the 1930s than it is now, because the British economy was depressed — mainly thanks to an ill-advised return to the gold standard — even before the Depression struck. On the other side, Britain had a notably mild Depression compared with the United States.
Even so, surpassing the track record of the 1930s shouldn’t be a tough challenge. Haven’t we learned a lot about economic management over the last 80 years? Yes, we have — but in Britain and elsewhere, the policy elite decided to throw that hard-won knowledge out the window, and rely on ideologically convenient wishful thinking instead.
Britain, in particular, was supposed to be a showcase for “expansionary austerity,” the notion that instead of increasing government spending to fight recessions, you should slash spending instead — and that this would lead to faster economic growth. “Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong,” declared David Cameron, Britain’s prime minister. “You cannot put off the first in order to promote the second.”
How could the economy thrive when unemployment was already high, and government policies were directly reducing employment even further? Confidence! “I firmly believe,” declared Jean-Claude Trichet — at the time the president of the European Central Bank, and a strong advocate of the doctrine of expansionary austerity — “that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”
Such invocations of the confidence fairy were never plausible; researchers at the International Monetary Fund and elsewhere quickly debunked the supposed evidence that spending cuts create jobs. Yet influential people on both sides of the Atlantic heaped praise on the prophets of austerity, Mr. Cameron in particular, because the doctrine of expansionary austerity dovetailed with their ideological agendas.
Thus in October 2010 David Broder, who virtually embodied conventional wisdom, praised Mr. Cameron for his boldness, and in particular for “brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.” He then called on President Obama to “do a Cameron” and pursue “a radical rollback of the welfare state now.”
Strange to say, however, those warnings from economists proved all too accurate. And we’re quite fortunate that Mr. Obama did not, in fact, do a Cameron.
Which is not to say that all is well with U.S. policy. True, the federal government has avoided all-out austerity. But state and local governments, which must run more or less balanced budgets, have slashed spending and employment as federal aid runs out — and this has been a major drag on the overall economy. Without those spending cuts, we might already have been on the road to self-sustaining growth; as it is, recovery still hangs in the balance.
And we may get tipped in the wrong direction by Continental Europe, where austerity policies are having the same effect as in Britain, with many signs pointing to recession this year.

The infuriating thing about this tragedy is that it was completely unnecessary. Half a century ago, any economist — or for that matter any undergraduate who had read Paul Samuelson’s textbook “Economics” — could have told you that austerity in the face of depression was a very bad idea. But policy makers, pundits and, I’m sorry to say, many economists decided, largely for political reasons, to forget what they used to know. And millions of workers are paying the price for their willful amnesia.

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Why is the African continent poor?

Children in South Sudan

By Mark Doyle
BBC world affairs correspondent

The desolate, dusty town of Pibor on South Sudan’s border with Ethiopia has no running water, no electricity and little but mud huts for the population to live in.

You would be hard put to find a poorer place anywhere on earth.

I went there as part of a journey across Africa to ask the question “Why is Africa poor?” for a BBC radio documentary series.

We have oil and many other minerals – go name it

Barnaba Benjami, South Sudan regional co-operation minister

I was asked to investigate why it is that every single African country – with the exceptions of oil-rich Gabon and Algeria – is classified by the United Nations as having a “low” broadly defined Human Development Index – in other words an appalling standard of living for most of the people.

In Pibor, the answer to why the place is poor seems fairly obvious.

The people – most of whom are from the Murle ethnic group – are crippled by tribal conflicts related to disputes over cattle, the traditional store of wealth in South Sudan.

The Murle have recently had fights with the Lol Nuer group to the north of Pibor and with ethnic Bor Dinkas to the west.

In a spate of fighting with the Lol Nuer earlier this year several hundred people, many of them women and children, were killed in deliberate attacks on villages.

There has been a rash of similar clashes across South Sudan in the past year (although most were on a smaller scale than the fights between the Lol Nuer and the Murle).

And so the answer to why South Sudan is poor is surely a no-brainer: War makes you destitute.

Why is there so much war?

And yet South Sudan is potentially rich.

Fisherman on Lake Victoria
Our leaders, they just want to keep on being rich. And they don’t want to pay taxes

Fisherman on Lake Victoria

“It’s bigger than Kenya, Uganda, Rwanda and Burundi combined,” the South Sudan Regional Co-operation Minister Barnaba Benjamin, enthused.

“Tremendous land! Very fertile, enormous rainfall, tremendous agricultural resources. Minerals! We have oil and many other minerals – go name it!”

The paradox of rich resources and poor people hints at another layer of explanation about why Africa is poor.

It is not just that there is war. The question should, perhaps be: “Why is there so much war?”

And the headline question is in fact misleading; Africans as a people may be poor, but Africa as a place is fantastically rich – in minerals, land, labour and sunshine.

That is why outsiders have been coming here for hundreds of years – to invade, occupy, convert, plunder and trade.

But the resources of South Sudan, for example, have never been properly developed.

During colonial rule South Sudan was used as little more than a reservoir of labour and raw materials.

Then independence was followed by 50 years of on-off war between the south and north – with northerners in Khartoum continuing the British tactic of divide and rule among the southern groups.

Some southerners believe this is still happening today.

Corruption

On my journey across the poorest, sub-Saharan swathe of the continent – that took in Liberia and Nigeria in the west, Sudan in the centre, and Kenya in the east – people explored the impact that both non-Africans and Africans had had on why Africa is poor.

Ellen Johnson-Sirleaf

Ellen Johnson-Sirleaf says she underestimated the problem of graft

Almost every African I met, who was not actually in government, blamed corrupt African leaders for their plight.

“The gap between the rich and the poor in Africa is still growing,” said a fisherman on the shores of Lake Victoria.

“Our leaders, they just want to keep on being rich. And they don’t want to pay taxes.”

Even President Ellen Johnson-Sirleaf of Liberia came close to this when she told me she had underestimated the level of corruption in her country when she took office.

“Maybe I should have sacked the whole government when I came to power,” she said.

“Africa is not poor,” President Johnson-Sirleaf added, “it is poorly managed.”

This theme was echoed by an architect in Kenya and a senior government official in Nigeria.

Both pointed out that the informal sector of most African economies is huge and almost completely unharnessed.

Eastleigh in Nairobi

Eastleigh has the most expensive real estate in Nairobi

Marketplaces, and a million little lean-to repair shops and small-scale factories are what most urban Africans rely upon for a living.

But such is their distrust of government officials that most businesspeople in the informal sector avoid all contact with the authorities.

Kenyan architect and town planner Mumo Museva took me to the bustling Eastleigh area of Nairobi, where traders have created a booming economy despite the place being almost completely abandoned by the government.

Eastleigh is a filthy part of the city where rubbish lies uncollected, the potholes in the roads are the size of swimming pools, and the drains have collapsed.

Kenyan architect and town planner Mumo Musev
Africa is not poor. Africa is just poorly managed

Architect Mumo Museva

But one indication of the success of the traders, Mr Museva said, was the high per-square-foot rents there.

“You’ll be surprised to note that Eastleigh is the most expensive real estate in Nairobi.”

He added that if Eastleigh traders trusted the government they might pay some taxes in return for decent services, so creating a “virtuous circle”.

“It would lift people out of poverty,” he said.

“Remember, poverty is related to quality of life, and the quality of life here is appalling, despite the huge amount of wealth flowing through these areas.”

Then the young Kenyan architect echoed the Liberian president, some 5,000km (3,000 miles) away on the other side of the continent.

“Africa is not poor,” he also said.

“Africa is just poorly managed.”


You can hear the first of Mark Doyle’s programmes Why is Africa poor? on the BBC World Service on Monday 24 August 2009 at 0906 GMT, 1406 GMT and 1906 GMT. It will also be available for a week on the website.

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Q&A: Obama stimulus plan

Barack Obama at the House Democrats Conference in Williamsburg, Virginia

Mr Obama has made the stimulus plan his priority

The US Senate has agreed a slimmed-down economic stimulus plan worth about $780bn (£528bn) aimed at boosting the US economy.

President Barack Obama, who proposed the package, has repeatedly warned that the US could face an economic disaster if radical action is not taken.

Why has such a big stimulus plan been proposed?

The US economy is entering its sharpest downturn since before World War II, according to many economists.

Supporters of the measures say that without the stimulus, the downturn that began at the end of 2007 could last well into 2010. The slump has already cost three million jobs.

President Obama has made passing the stimulus package his priority, saying that millions more jobs could be lost during the recession.

As US interest rates are already approaching zero, it is clear that other policies must be considered to revive the economy.

FULL ARTICLE>>>

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EU 2008 Special Report

A special edition of the Record Europe this week looks back at the past year in the EU institutions.

We ask whether the EU offered any real solutions on some of the key issues like climate change, the economic crisis and the Lisbon Treaty.

As Members of the European Parliament prepared to leave for their Christmas break, we caught up with four of them in the Strasbourg studio, asking them to pinpoint their most significant moments over the past 12 months:

• British Labour’s Michael Cashman

• Kathalijne Buitenweg, a Dutch Green MEP

• Markus Ferber, a German Centre-Right member

• MEP Nigel Farage, who leads the UK Independence Party

FULL ARTICLE >>>>

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