The deterrent question

20 September 2012 By Neil Unmack Follow @unmack1

The central bank’s bailout-light plan depends on countries sticking to serious reforms. But pulling the plug if a country veers off track could have disastrous consequences. That weakens the central bank’s hand, but doesn’t mean that bond-buying is a pathway to unbridled moral hazard.

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Christian Noyer, governor of the Bank of France said in an interview that the European Central bank would not hesitate to stop buying bonds if a country failed to keep up with its reforms.
“We will not hesitate to stop the purchases immediately, if the ESM programme is not being followed strictly”, Noyer said in an interview with German daily Frankfurter Allgemeine Zeitung, published on Sept. 20.
The European Central Bank has unveiled a new programme of conditional bond purchases, called outright monetary transactions. The central bank will buy a country’s bonds once the country has signed up to a bailout through the European Stability Mechanism (ESM) and agreed a reform programme with the European Commission, International Monetary Fund and European Central Bank.

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