It took a long time for the buyers of Europe’s debt to throw in the towel but back in July and August, as the European debt crisis deepened, they did so. The lack of buyers for Spanish and Italian bonds (among others) caused yields to jump to dangerous levels and risked a debt spiral followed by default.
Faced with the certain breakup of the Eurozone, the ECB opted to become the lender of last resort in Europe. As a result the amount of government bonds sitting on its balance sheet rose rapidly from €74 billion in early August, to €203 billion as of 25 November – an increase of 174%.
Chart courtesy of German newspaper Der Spiegel
It is not surprising that the ECB has started down this road but it should be recognised that it’s one which is extremely dangerous. The asset-backed securities, public sector bonds, bank bonds, corporate bonds and other securities that the ECB has taken onto its balance sheet as collateral in exchange for loans designed to shore up the Eurozone now total a record €2.436 trillion, and many of these assets are of questionable value.
This is a road that leads to massive money printing and very high levels of inflation.