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Central Banks Gone Wild: ECB to Buy Assets Too?

After bashing Federal Reserve Chairman Ben Bernanke for his second round of asset buying, the European Central Bank may have to resort to the very same kind of quantitative easing to save the Euro, currency strategists and traders said.

“The ECB could step into the breach by buying a large amount of sovereign bonds from the periphery,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. “As the situation becomes more desperate, the unthinkable has to be thought. Within the ideological constructs and legal/treaty parameters, quantitative easing by the ECB may be one of the few ways out.”

The Euro hit a 10-week low versus the dollar as investors sold bonds and drove yields soaring on debt issued by Portugal, Spain and Belgium in a bet these countries are next to need a bailout. This is a reversal of fortune for Europe, when its currency rallied this summer on concern of slower growth and inflation in the U.S.

“The ECB has no problem buying the debt of the member states of the Union and that will act precisely as QEII,” said Dennis Gartman of The Gartman Letter. “Monetisation is monetisation is monetisation, no matter how it is done and no matter what assets are bought.”

BBH’s Chandler points out in his note that the ECB has in fact increased its purchases of sovereign bonds recently, but the amount has been miniscule, as some of the European bank chiefs have argued that bigger purchases would have a “limited impact.”

The Federal Reserve this month announced a program to purchase $600 billion in U.S. government bonds over the course of eight months in order to keep interest rates low and spark some healthy growth.

After that move, German Finance Minister Wolfgang Schaeuble called Bernanke’s policy “clueless” and likely to spark inflation. Printing money and adding liquidity will not solve the global economy’s problems, German officials and other critics of Bernanke argue.

“Once Germany faces rising interest rates” they will rethink their position on quantitative easing, said Brian Kelly, founder of Kanundrum Capital. “In Bernanke's research of The Depression he found that countries that expanded money supply the fastest recovered the fastest. If this holds true for this recovery, then the US should recover faster than Europe which means rates will rise sooner in the US than in Europe. Even a hint of this occurring will be enough to reverse the speculative flows, which we are seeing right now.”

Germany, which contrary to the rest of the world reported its lowest level of unemployment since 1991 today, does not want to be the piggy bank for future EU bailouts. Instead of quantitative easing, they would like bondholders to take a haircut under the conditions of any future bailouts. ECB’s President Jean-Claude Trichet is reluctant to fully accept that proposal in any proposed mechanism for resolving sovereign debt crisis on fears that would send interest rates even higher.

“Following in our footsteps off the edge of an economic cliff would be a huge mistake,” said Peter Schiff, CEO of Euro Pacific Capital. “Europe is already making their share of mistakes as no nation should get a bailout. Debt should be restructured with bondholders taking the hits. Also government spending and borrowing should be reduced.”

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Trader disclosure: On November 30, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Seymour owns (TEF); Seymour owns (AAPL); Seymour owns (BAC); Adami owns (AGU); Adami owns (BTU); Adami owns (NUE); Adami owns (C); Adami owns (GS); Adami owns (INTC); Adami owns (MSFT); Adami’s wife works at Merck; Grasso owns (ASTM); Grasso owns (BA); Grasso owns (BAC); Grasso owns (BWC); Grasso owns (C); Grasso owns (CSCO); Grasso owns (JPM); Grasso owns (LPX); Grasso owns (MOT); Grasso owns (MHY); Grasso owns (NDAQ); Grasso owns (PFE); Grasso owns (PRST); Grasso owns (X); Terranova Owns (UPL); Terranova Owns (C); Terranova Owns (PEP); Terranova Owns (VRTS); Terranova Owns (GS); Terranova Owns (OXY); Terranova Owns (OIH); Terranova Owns (AXP); Terranova Owns (FCX); Terranova Owns (AAPL); Terranova Owns (POT); Terranova Owns (NKE)

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