...ECB to Become Buyer of "Only" Resort; Expect Failure of Thursday's ItalianBond Auction; Who Will Bail Out the ECB?

A critical Italian government bond auction is coming up Thursday, August 4. That bond auction is highly likely to fail. However, if it does fail, don't expect results to be reported that way.

The chief economist at Citigroup says ECB to Revive Bond-Buying to Protect Italian Auction This Week

Former Bank of England policy maker Willem Buiter said the European Central Bank will revive its bond-buying program to safeguard this week's auction of Italian bonds.

"The ECB will intervene on whatever scale is necessary to allow Italy to conduct its auction on Thursday," Buiter, now chief economist at Citigroup Inc., told reporters in London today. "If the ECB doesn't come in, the Italian bond auction is likely to fail."

Nonsense from Citigroup

Buiter's statements are of course complete nonsense. If the ECB steps in it will be because the auction failed. The act of intervention will not turn a failed auction into a successful one.

What the hell is the matter with chief economists who do not understand simple economic principles?

Protection? Really?

Here is another ridiculous headline on the same subject from The Telegraph: ECB to protect Europe by buying bonds

The European Central Bank is expected to signal it is stepping into the eurozone debt crisis on Thursday by reopening its purchases of government debt, amid fears the turmoil will claim the economy of a nation that is "too big to bail".

Officials on Wednesday night said the ECB's monthly meeting was expected to see a reversal on the buying of sovereign bonds after 18 weeks of staying out of the markets, because of an EU institutional vacuum that threatens to drag down Italy and Spain, the region's third and fourth-largest economies.

With EU officials scrabbling to fine-tune changes to allow the eurozone's €440bn (£384bn) bail-out fund to intervene in the markets, central bankers are expected to reluctantly accept the precedent of allowing ECB bond buy-backs in May 2010.

Measures allowing the European Financial Stability Facility (EFSF), the bail-out fund created last summer, new powers to buy the bonds of struggling countries were agreed at an emergency euro summit on July 21 in an attempt to protect Italy (whose public debt and bank exposure is shown in the interactive graphic above) and Spain.

However, legally changing the basis of the EFSF and ratifying the changes in 17 eurozone countries, where the expanded fund's role is controversial in German, Dutch and Finnish parliaments, could take weeks or even months, leaving a dangerous vacuum.

"We're watching the ECB which, unlike the eurozone, can intervene now and build a bridge until the EFSF can take up its new role in the autumn," said an official.

Buyer of Only Resort

The idea the ECB can "protect" Italy by buying Italian bonds is as silly as the idea the ECB could protect Greece by buying Greek bonds. We all know how the Greek purchase turned out.

Market forces will overrule anything the ECB can do.

Worse yet, the ECB is exacerbating the problems. If the ECB misprices bonds and does so repetitively, other participants will eventually step to the sidelines and the ECB will become the buyer of only resort, with a balance sheet full of garbage and obvious implications.

Who Will Bail Out the ECB?

Who pray tell will bail out the ECB? The correct answer is no one, and this is one of the driving forces of gold.

For more on nonsensical central bank actions driving the price of gold, please see Quantitative Easing Begins in Switzerland to Counteract Soaring Swiss Franc, Central Bank "Aims to Bring 3-Month LIBOR to 0%"; Gold Soars