# Central bank-effected interest cap on government bonds

- Canonical URL: https://www.gerhardmerk.de/central-bank-effected-interest-cap-on-government-bonds
- Post ID: 591015
- Modified: 2023-07-25T20:58:16+00:00
- Language: en

## Definition

In summer 2012, the ECB announced its intention to introduce interest rate ceilings (ceiling rates, [interest] caps) for the government bonds of stumbling EMU members. In this case, the ECB will buy securities on the market whenever their prices fall below a certain threshold or their interest rates exceed a certain limit. - The ECB's policy of setting upper limits for interest rates on government bonds, above which it intervenes, has a number of easily recognizable serious negative consequences. -- Sovereigns are thus insulated from the sanctioning effect of the capital market, which is tantamount to inviting lax fiscal policy: the will to reform is paralyzed and investors turn away from the euro area altogether.-- Investors are hedged against price losses, which distorts investment behavior in favor of government bonds and at the expense of other securities. -- Monetary policy loses its independence vis-à-vis fiscal policy. -- Purchases of government bonds by the ECB basically have a distribution effect within the EMU member countries and are not part of a rule-based monetary policy per se. -- The ECB cannot include government bonds at risk of default in its portfolio without limitation; ultimately, the members with prudent and sound budgetary policies are liable for the risks, and this increases public disenchantment with Europe ("not that Europe!") with far-reaching long-term consequences. -- Last but not least, the EU Treaty (Article 125 TFEU) explicitly contains a non-bail-out clause: the Community is not liable for the debts of any public entities in the member states. The government bond interest rate cap clearly violates this agreement. - See presumption, central banking, buyouts, central banking, bail-out, internal flexibility, blame game, deficit financing ban, European Stabilization Mechanism, one-vote principle, EMU bust, ECB sin-bin, exit, peer pressure, kindergarten argument, neuro, policy clamp, rescue, bailout, shadow state, debt club, seven percent limit, solidarity, financial, Stability and Growth Pact, stabilization mechanism, European, southern front, redistribution, central-bank-induced, debt-productivity-linkage, contract compliance, interest rate smoothing. - Cf. Monthly Report of the Deutsche Bundesbank of October 2012, p. 19 f. (any kind of financial assistance only provides breathing space, which must be used for reform measures). Attention: The financial encyclopedia is protected by copyright and may only be used for private purposes without express consent! University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec. Professor Dr. Eckehard Krah, Dipl.rer.pol. E-mail address: info@ekrah.com https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk https://www.jung-stilling-gesellschaft.de/merk/ https://www.gerhardmerk.de/

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