The ECB bond buying program seems a odd combination of actions to please everyone. It will include unlimited purchases of government sovereign debt. This means that the ECB will backstop the Spanish bond market. However, the ECB will also engage in sterilization so that the same amount of bonds held in portfolio will be sold in the market. So the ECB will buy an unlimited amount of bad bonds and sell off all of the creditworthy bonds. This should push down rates for risky bonds to prices that do not reflect their risk and it will push up yields for safe bonds to levels that do not reflect their safety. You penalize good countries to safer bad country bond markets. There is no price level that is a target so there is no way the market will know what are the intentions of the ECB. How does this help solve the debt crisis in Europe?
There is a substitution effect across these bond markets, but the actions of ECB is to force convergence of bond markets that should not be at the same risk levels.
What does this mean for the the balance sheet of the ECB? The ECB will now be holding bonds that have bankruptcy risk. Will the member central banks of the ECB bail-out the bank if bad bonds wipes out the capital base of the ECB? Of course, the idea of a capital base for a central bank is odd when there is fiat money system, but that is for another discussion.
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