Economists say the mooted ECB yield cap could save Eurozone

Tim Wallace
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ECONOMISTS yesterday hailed reports that the European Central Bank (ECB) may buy government bonds to stop yields rising to dangerously high levels, saying such action could at last defuse the debt crisis plaguing the economy.

The ECB could make the decision to cap yields’ spreads over German bunds at its next meeting in early September, according to Germany’s Spiegel magazine.

That would mean potentially unlimited purchases of Spanish and Italian government debt in an effort to aid those governments and ease panic in financial markets.

“This could be a major step to defuse tensions in the Eurozone and buy time for the fiscal repair and pro-growth reforms to work,” said Berenberg bank economist Holger Schmieding. “It could also shield the Eurozone from the turmoil of a potential Grexit,” he said, calling it “the most effective ECB tool to contain the crisis.”

Earlier this month the ECB said excessive yields are harming the transmission of monetary policy – a problem this policy could address.

Meanwhile Greek finance minister Yannis Stournaras told a Greek newspaper that the country will not be leaving the euro.

Keeping the currency “is the only choice that can protect us from a poverty that we have not experienced,” he told Vima tis Kyriakis, insisting further spending cuts are vital if the government is to receive the next tranche of its IMF and EU bailout cash.