Analysis: ECB's "nuclear option" better as deterrent than weapon

Mon Oct 1, 2012 1:56am EDT
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By Paul Taylor

PARIS (Reuters) - Buying unlimited quantities of bonds is sometimes described as a central bank's nuclear option, deploying an overwhelming force that threatens speculators with annihilation.

Like atomic weapons, the bank's powers to print money and buy securities are best held in reserve as a deterrent, even if their use would not wreak destruction on a comparable scale.

Having to use them to defend a country or a policy objective could cause unintended damage and expose fatal weaknesses in the political will to sustain the action.

European Central Bank President Mario Draghi seemed to borrow from the Cold War lexicon of deterrence in July when he told financial markets that the ECB would do "whatever it takes to preserve the euro. And believe me, it will be enough."

The Draghi Doctrine sounded a bit like the macho boast on unofficial Israeli Air Force T-shirts on sale in Jerusalem: "Mince with us and you'll end up as chopped liver."

But his fighting talk was soon questioned by skeptics in the financial markets and the commentariat.

Did he really have the weapons? Would he use them? Could he secure support from key stakeholders, most importantly European economic powerhouse Germany, for his strategy? Could he act without that? And could he keep going after a first strike?

The ECB chief sought to answer the doubters when he outlined a strategy for buying unlimited quantities of short-dated bonds of any euro zone country that requested a European assistance program and stuck to its strict conditions.   Continued...

The partially built new headquarters of the European Central Bank (ECB) is seen behind a fence with razor wire at its construction site in Frankfurt, September 19, 2012. REUTERS/Kai Pfaffenbach