Bailouts and Longer Term Refinancing Operations: When Temporary Cures Generate Longer Term Economic Concerns

Abstract

It is increasingly becoming apparent to domestic and international investors that the European Central Bank’s bond buying programme which commenced in May 2010, “a way of correcting market dislocations that were hampering the central bank’s conduct of monetary policy”, and its provision of much cheaper Longer Term Refinancing Operations (LTROs), constitute more of temporary, expected continuous measures aimed at addressing the Euro zone’s sovereign debt problems (through fostering demand for sovereign debt and damping increases in yields). This paper is aimed at evaluating means whereby a redress of the Euro zone’s sovereign debt problems could be effectively achieved. In addition to present regulatory efforts and regulatory measures, it also considers other measures - one of which aims to combine “quantitative easing” schemes with other policies which would effectively address the need to reduce the debt burden of countries such as Greece, Portugal, Spain, Ireland and Italy, whilst incorporating corrective measures which lead to a growth in economic activities as well as increased competitiveness. The emphasis on tough fiscal measures - rather than the need for more stringent regulatory financial reforms is also considered to have played a contributory role – not only in the difficulty encountered by heavily indebted countries in reducing their levels of sovereign debts, but also creating further debts.