The ECB, Europe's Central Bank, has launched a sovereign bond buying program, arguing for price stability and to make it clear the Euro is here to stay. ECB President Mario Draghi:

It is against this background that the Governing Council today decided on the modalities for undertaking Outright Monetary Transactions (OMTs) in secondary markets for sovereign bonds in the euro area. As we said a month ago, we need to be in the position to safeguard the monetary policy transmission mechanism in all countries of the euro area. We aim to preserve the singleness of our monetary policy and to ensure the proper transmission of our policy stance to the real economy throughout the area. OMTs will enable us to address severe distortions in government bond markets which originate from, in particular, unfounded fears on the part of investors of the reversibility of the euro. Hence, under appropriate conditions, we will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area. Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible.

This is an unlimited, open ended, short term maturity of one to three years, Euro area governments' bonds buy back program. The details are as warranted, dependent upon market conditions and at market value.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

No ex ante quantitative limits are set on the size of Outright Monetary Transactions

The ECB will pay for these purchases by reducing the money supply by the same amount. This is known as sterilization. We can see the ECB is already defending itself against the legality of their OMT plan, since officially the ECB cannot finance governments. The ECB is going to enlist the IMF for monitoring and conditionality design for buying bonds of specific countries.

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

The ECB also has some bleak GDP projections, admitting the Euro area is in recession.

Recently published statistics indicate that euro area real GDP contracted by 0.2%, quarter on quarter, in the second quarter of 2012, following zero growth in the previous quarter. Economic indicators point to continued weak economic activity in the remainder of 2012, in an environment of heightened uncertainty. Looking beyond the short term, we expect the euro area economy to recover only very gradually. The growth momentum is expected to remain dampened by the necessary process of balance sheet adjustment in the financial and non-financial sectors, the existence of high unemployment and an uneven global recovery.

The September 2012 ECB staff macroeconomic projections for the euro area foresee annual real GDP growth in a range between -0.6% and -0.2% for 2012 and between -0.4% and 1.4% for 2013. Compared with the June 2012 Eurosystem staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The OECD also is pointing to a recession in Europe:

The G7 economies are expected to grow at an annualised rate of just 0.3 percent in the third quarter of 2012 and 1.1 percent in the fourth.

The OECD projects that the euro area’s three largest economies – Germany, France and Italy – will shrink at an annualised rate of 1 percent on average during the third quarter and at 0.7 percent in the fourth.

Seen individually, the German economy is expected to contract at an annualized rate of 0.5 percent in the third quarter and at 0.8 percent in the fourth. The French outlook is slightly better, with contraction at an annualised rate of 0.4 percent in the third quarter followed by a slight pick up in growth at 0.2 percent in the fourth. In Italy, the deep recession will continue with contraction at an annualised rate of 2.9 percent in the third quarter and 1.4 percent in the fourth.

In spite of the dismal economic contraction estimates, inflation is clearly high by comparison to the United States, although seemingly dependent upon energy prices. The ECB kept interest rates at near zero, 0.75%

Euro area annual HICP inflation was 2.6% in August 2012, according to Eurostat’s flash estimate, compared with 2.4% in the previous month. This increase is mainly due to renewed increases in euro-denominated energy prices. On the basis of current futures prices for oil, inflation rates could turn out somewhat higher than expected a few months ago, but they should decline to below 2% again in the course of next year. Over the policy-relevant horizon, in an environment of modest growth in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain moderate.

The September 2012 ECB staff macroeconomic projections for the euro area foresee annual HICP inflation in a range between 2.4% and 2.6% for 2012 and between 1.3% and 2.5% for 2013. These projection ranges are somewhat higher than those contained in the June 2012 Eurosystem staff macroeconomic projections.

In spite of this is seems the ECB is still demanding austerity.

On the fiscal front, it is crucial that governments undertake all measures necessary to achieve their targets for the current and coming years. In this respect, the expected rapid implementation of the fiscal compact should be a main element to help strengthen confidence in the soundness of public finances.

Yet another condition on getting the ECB to buy those soaring yield bonds is to go to the austerity laden, draconian conditions and terms, EFSF and ESM bail out programs first. Even with the ECB stepping in to reduce the cost for governments to borrow, there is a catch, landing them smack dab into more austerity. Let's see Greece's unemployment rate is about 25% as is Spain's and now Europe is re-entering recession. Ain't austerity grand?

The adherence of governments to their commitments and the fulfillment by the EFSF/ESM of their role are necessary conditions for our outright transactions to be conducted.

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases.

Greece just lost €10 billion in their government sponsored pension plan and many now face poverty. Literally retirees in Greece are committing suicide in droves.

Greece’s state-controlled pension funds saw the nominal value of their government bond holdings drop 10.7 billion euros ($13.4 billion) after the country’s debt swap earlier this year, Finance Minister Yannis Stournaras said.

It fell to 13 billion euros from 23.7 billion euros, Stournaras, citing Bank of Greece data, said in a written response to a lawmaker’s question distributed to reporters yesterday.

Greece reduced its debt by about 100 billion euros when bondholders agreed to the biggest sovereign restructuring in history in March. The debt swap and bailouts from the European Union and the International Monetary Fund aim to reduce Greek debt to 120 percent of gross domestic product by 2020 from 165 percent last year.

In other words, this program is not a guarantee, we can see the demand for austerity in spite of economic contraction and national ruination and the IMF is going to impose country-specific terms. Ouch, plus governments must come begging to the ECB and IMF.

The idea is to keep the bond prices stable so governments can at least refinance their debt at reasonable cost. Considering what has happened in Greece though, these days, what is reasonable?