The ECB kept interest rates on hold yesterday as expected. The real news was the announcement of further bond purchases. A bond is wherea lender buys adebt with an agreement that itwill be sold back at a higher price in the future. So if you bought a bond from me for 50, I might buy it back at 55 in a years time, gaining you a 5 profit (the yield). There are lots of different variations on how the amounts and dates of repaymentare calculated but this is essentially how it works.
Recently the yields (returns) on some eurozonegovernment bonds have risen significantly, as the risk of holding such positions has intensifiedunder the debtfears with a risk that they may not be able to pay these bonds and other loans back.
What the ECB has done is spent 67 billion in buying up some ofthese bonds. This has improved confidence in the bond market, meaning the yields come down and more bonds can be sold.It is a form of QE although it is worth noting this sum is significantly less than the trillions of dollars and billions of pounds the US and UK have spent to inject liquidity into their financial systems.
Trichet, the president of the ECB has categorically said he will not allow the crisis to get out of hand and that he is prepared to take whatever steps to manage the crisis.
It is importnat to recognise however that we have been here many times before with the ECB. To use a metaphor mentioned here on ERF, the bucket has a hole in it and they are simply ploughing more water in which is only a short term solution and does nothing to tackle the root causes.
Conversely the UK has undergone a massive spending review and is posed to make major changes to government policy in the coming years to tackle our problems. The PIIGS have been forced to do this too, although their problems are arguably worse and more difficult to tackle. Spain has 20% unemployment!Theissue of cutting spending whilst promoting growth is a major concern thatwill remain for the UK and Europefor many years.