From the comments, on eurozone sterilization

From this post, on the ECB and the new bailout procedures:

No, but it can tighten policy just as easily by raising the rate paid on cash in its deposit facility. Indeed, this is part of its usual operating procedure: the headline “repo rate” lies at the center of a corridor, with the deposit rate at the bottom. Already there are enough excess reserves sloshing around that the deposit rate is arguably the true risk-free short rate. There are currently 350 billion euros in the deposit facility (so this is the marginal rate paid on cash for a lot of banks!), and the EONIA overnight rate is at 0.1%, far closer to the 0% deposit rate than the 0.75% repo rate.

As long as this continues, the ECB can just follow its normal operating procedure, keeping in mind that the “true” rate is 75 basis points below the rate it’s announcing. There’s no real effect from having greater or fewer excess reserves outstanding; in my view, the “sterilization” program is a meaningless way of appeasing people who still hew to some kind of crude monetarism and don’t understand how the ECB’s policy actually works.

The critics are right about one thing, though; the taxpayers are the residual claimants here. If the ECB buys lots of Italian and Spanish debt and then they either default or leave the Euro, a hole will be blown in its balance sheet, and if insolvent it will require a taxpayer bailout. (And even if it’s not insolvent, profits that would otherwise have been remitted to taxpayers will disappear.) This is a fairly likely scenario.


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