This is bizarre. When a central bank purchases bonds, it puts new money into the economy. Since that would be inflationary, the central bank can soak up some of the money by selling bonds. For the US, this could be used to change the average maturity of Treasuries (i.e. buy 10 year, sell an equal amount of 2 year). When the ECB does it, it can either change the average maturity or change the average quality (i.e. buy Greek, sell an equal amount of German). But that kind of zero sum behavior robs Peter to pay Paul by necessity. Also, it exposes the central bank’s balance sheet to bad assets. This undermines the strength of the Euro.

Instead, the central bank is buying bad assets, and telling the banks that it is buying the junk from not to go out and spend the money. They’re being told to pretend the money simply isn’t there. There’s a bit of humor in this situation, of course. If the Euro continues its decline, the money might as well not be there. Note that this “sterilization” doesn’t solve the problem created by having junk on the central bank’s balance sheet. The central bank is exposed.

These kinds of shell games are supposed to restore confidence in the market, but I fail to see why confidence should be restored. The mere fact that the bank is resorting to parlor tricks as a means of manipulating the market is terrifying.