Introduction

Anxieties about central banks' interventions in financial markets often arise during periods of crisis. Extraordinary measures may trigger controversies when existing policy solutions are difficult to translate across institutional landscapes. The European Central Bank's (ECB's) decision to initiate the Securities Market Programme in May 2010, as governments in the Eurozone's peripheries faced increasing borrowing costs, offers an interesting example. The strongest opposition, mostly although not exclusively voiced by German policymakers (including the German representatives on the ECB Governing Council), warned that purchases of government bonds are ill-advised on legal, political, and economic grounds, contravening the Maastricht Treaty prohibition of public debt monetization, reducing the urgency for fiscal adjustments and distorting financial markets (Belke 2010; Weidmann 2012). According to this account, interventions in sovereign bond markets cement the view that the ECB is the only institution that can effectively contain a crisis, turning the central bank into a “whipping boy” for political elites hesitant to engage with the structural problems underpinning the euro crisis. In turn, the ECB attributed its interventions to legitimate concerns with stabilizing disrupted markets segments crucial to the transmission of monetary policy signals rather than as attempts to ease governments' financing conditions. It simultaneously reaffirmed commitment to its constitutional mandate, price stability, and a rapid unwinding of extraordinary crisis measures that would allow the return to the pre-crisis policy framework (ECB 2010a; Trichet 2009). Two years later, the ECB went further, and announced that it would do whatever it takes through the Outright Monetary Transactions program, a commitment to buy government bonds in order to stabilize the European financial system.

Theoretical accounts of central banks' presence in financial markets distinguish between normal and crisis periods. During “normal” times, interventions occur in one market, the interbank market, where banks trade liquidity to enforce model-guided policy decisions (Allen et al. 2008). Under the efficient market hypothesis, steering the interbank rate allows central banks to influence broader financing conditions in the economy. In contrast, the theoretical foundations of crisis interventions are less straightforward. Central banks may resort to non-standard interventions once policy interest rates have been lowered to zero (Bernanke and Reinhart 2004).