Occupy The Bundesbank by Yglesias

News Analysis: Lending a Hand to Banks, but Not to Nations by Jack Ewing

Informative piece on the ECB.

Correction: November 15, 2011

An earlier version of this article mischaracterized the practices of the United States Federal Reserve.  It does not buy government bonds directly from the United States Treasury; it does so on the open market.

Also:

As a central bank, the E.C.B. could theoretically use its ability to print money to buy huge amounts of debt from Italy and other countries. That would drive down their borrowing costs and ensure that they could continue to service their debts — that they would remain liquid, in other words.

The central bank’s charter does not allow it to buy bonds directly from national treasuries. And yet, the central bank can and does do essentially the same thing, by buying government bonds on the open market.

Since last year, the bank has spent 187 billion euros intervening in bond markets. But the relatively modest sums, less than 10 percent of the central bank’s total balance sheet, have not been enough to prevent yields on Italian bonds from rising.

[Except that after breaching 7 percent last week, the Italian 10-year did head back down because of the E.C.B. I assume. It might have been reported, I can't remember. But it's back up even after Berlosconi was replaced with a technocrat.)

If the interest rates that Italy must pay to borrow remain at their current levels, the government could eventually go bankrupt.

The only limit to the central bank’s ability to create money is a psychological one — the fear of setting off too much inflation. Mainstream economists, though, do not see any risk of significant inflation under current circumstances. The euro area is headed for recession, unemployment is rising and factories are not producing as much as they could. That is why economists tend to encourage the bank to put more money into circulation.

Seems to me that that the ECB could be the lender of last resort by buying up Italian bonds.