Posts: 12,025
Threads: 1,809
Joined: Apr 2008
Reputation:
227
An aborted recovery at this point might be more than democratic societies can tolerate
The US and China are withdrawing stimulus on purpose. The eurozone is doing so by accident, letting market forces drain liquidity from the financial system for month after month.
The balance sheet of the European Central Bank has fallen by €553bn over the past year as banks repay money that they no longer want, either because ECB funds are too costly in a near-deflationary world or because lenders are being compelled by regulators to shrink their books.
This is "passive tightening" or "endogenous tapering". The ECB balance sheet has plummeted to 23pc of eurozone GDP from a peak of 32pc in July 2012.
Hardliners will be delighted to learn that we now have synchronized G3 global tightening at last, further compounded by enforced tightening in Brazil, India, Turkey, South Africa and a string of emerging market states trying to defend their currencies. At least two-thirds of the global economy is turning down the liquidity spigot.
This is causing collateral damage everywhere. Japan's Nikkei index of equities is down 14pc this year, a victim as ever from safe-haven flight into the yen. Julian Jessop, from Capital Economics, said this is not yet enough to derail's Japan's recovery, but nothing can be excluded at this point. "Investor sentiment is clearly very negative and the risks of a downward spiral are growing," he said.
The eurozone has been growing just enough on export growth and a burst of restocking to create the illusion of recovery, though business investment continues to fall each month, dropping to modern-era low of 18.9pc. (It was 21pc even during the depths of the dotcom bust in 2003.)
Retail sales fell 1.6pc in December, the biggest drop for two-and-a-half years. The unemployment rate has stabilised at 12pc, but only because so many people have dropped off the rolls or fled abroad. Italy has lost a further 425,000 jobs over the past year.
Euroland is sliding further into Japanese deflation trap every month, whatever they claim in Frankfurt. Passive tightening has caused private sector loans to fall by €155bn over the past quarter. "The ECB's insistence on waiting for more evidence of deflation is a dangerous gamble. Delays are costly, and risk allowing pathologies to fester," said Ashoka Mody, until recently the International Monetary Fund's Troika firefighter in Ireland and now a contributor to Bruegel.
Core inflation has fallen to 0.6pc when you strip out taxes. The ECB has failed to meet its own 2pc inflation by a shocking margin, and missed its 4.5pc M3 money supply target (If it remembers that it had one) by an even bigger margin, and is therefore in breach of its EU treaty obligations. It has ignored pleas for action from the IMF and the OECD.
"The ECB should be picking up the baton of quantitative easing from the Fed instead of sitting on its hands. They have presided over tight monetary policy for so long that they have let an intense deflation risk take hold," said Andrew Roberts, credit chief at RBS.
There have been hints from Frankfurt that the Bundesbank is at last willing to let the ECB stop "sterilisation" of its bond holdings, perhaps as soon as this Thursday's policy meeting. Such a move would be tantamount to QE worth up to €175bn. "The meeting is enormously important. If they don't act, this could snowball," said Mr Roberts.
But the ECB's Mario Draghi has been burned before. He was pilloried in Germany for his emergency rate cut in November, intended to give Euroland a safety buffer against deflation. This time he wants the Bundesbank out in front, openly and fully committed. Mr Draghi is tired of dealing with ideologues who either wish to reduce the eurozone to a hard core, or who have not yet accepted the political, strategic and moral responsibilities inherent in the creation of monetary union. You can see the glint of anger in his eyes. It is his turn to hold their feet to the fire.
Peter Bofinger, one of Germany's five "Wise Men" and a critic of the Bundesbank foot-dragging, said the ECB should launch "far-reaching bond purchases" immediately to head off the danger of deflation, deeming any other measure to be a drop in the bucket at this stage.
The ECB's tight policy has led to the surreal situation where the world's weakest economy - barely out of a deep recession - has the strongest currency. This dynamic is all too familiar to anybody who remembers what happened to Japan. "The greatest danger for the eurozone recovery is a further rise in the euro. They must avoid a rise to $1.40 at all costs," said Mr Bofinger.
But he is a rare voice in Germany, and circumstances are vastly complicated by wrangling at the constitutional court in Karlsruhe on the legality of the ECB's rescue operations.
We know that all five expert witnesses attacked Mr Draghi's bond rescue plan for Italy and Spain in hearings last June. The Bundesbank itself savaged him in its own pleading, even arguing that it is not the task of the ECB to prevent countries being thrown out of the euro. The court has delayed its ruling until April. Paralysis reigns.
It is often said that the ECB has no mandate to conduct QE. This claim is a smoke-screen. The ECB has an over-riding treaty obligation to support the general purposes of the Union. It can at any time buy EMU bonds across the board - weighted by GDP - in any volume it chooses as a tool of liquidity management, or it can buy gold, pig iron, equities, vintage wine, green cheese or anything else.
There is no prohibition on open-market operations. If there were such a ban, the ECB could not function as a central bank. It has already bought the bonds of Greece, a country that was insolvent, which surely is illegal under the Maastricht Treaty. The whole argument over QE has become hopelessly confused.
Deflation creeps up on countries and on central banks. There is no cliff-edge moment. The effects can be toxic for high-debt states even before the price level reaches zero, since the interest burden rises faster than the underlying base of nominal GDP. "The lower the inflation rate, the more dangerous it is for the eurozone recovery," says Olivier Blanchard, the IMF's chief economist.
The argument is by now well-known. Club Med states cannot deflate their economies to claw back competitiveness against northern Europe while at the same time controlling their debt trajectories. The two objectives are in contradiction. It is a key reason why Italy's debt has jumped from 119pc to 133pc of GDP since 2010 despite a primary surplus.
Global liquidity is drying up
A study by the Bruegel think-tank in Brussels found that each one percentage point fall in the EMU-wide inflation rate forces Italy to increase that surplus by an extra 1.3pc of GDP to stabilise public debt. It becomes a Sisyphean task, ultimately self-defeating.
Put bluntly, the ECB is condemning Italy, Spain and Portugal to long-term insolvency by failing to comply with its own M3 and inflation targets.
Frankfurt must now act with extreme care. The ECB is a global institution, not a regional Riksbank for the Lower Rhine. What it does on Thursday will set the tone for world bourses and may decide whether the emerging market storm turns into a full-blown crisis.
If mishandled, contagion could blow straight back into the ECB's face through financial links to Asia, Eastern Europe and Latin America. European (and British) banks have lent $3.4 trillion to emerging markets, four times as much as US banks. Spain's Santander has a $132bn exposure to Latin America, half in Brazil.
The long-suffering citizens of southern Europe and Ireland have put up with the failings and 1930s ideology of EMU policy-makers with remarkable stoicism for a long time. An aborted recovery at this point - with an another leg up in mass unemployment - might be more than democratic societies can tolerate.
There is a concept in physics known as a critical state, the moment when apparent stability suddenly gives way to drastic change. Europe must be getting close.
Posts: 12,025
Threads: 1,809
Joined: Apr 2008
Reputation:
227
It's a fairly curious development, centrist and left-wing Keynesians are now essentially on the same side of the fence as right wing monetarists like Evans-Pritchard, but Pritchard's clarity in these issues is undeniable, and the clock is ticking.
Posts: 12,025
Threads: 1,809
Joined: Apr 2008
Reputation:
227
Here's the follow-up after the ECB meeting today:
Mario Draghi said the ECB’s council had discussed a wide range of measures but needed more information
The European Central Bank has brushed aside calls for radical action to head off deflation and relieve pressure on emerging markets, denying that the eurozone is at risk of a Japanese-style trap.
Yields on German two-year notes almost doubled to 0.12pc as markets slashed expectations for future rate cuts, while the euro spiked 1.5 cents to more than $1.36 against the dollar, implying a further tightening of monetary conditions for Europe.
Mario Draghi, ECB president, said the bank is “alert to the risks, and stands willing and ready to act” if inflation falls even further below target or if the fragile recovery falters, but offered no clear guidance on future policy.
Deutsche Bank, BNP Paribas, Barclays and RBS had all expected a cut in the main interest rate, while there had been widespread reports that the ECB would open the door to quantitative easing - allegedly by halting "sterilisation" of its €175bn bond holdings.
“Monetary policy in the eurozone is incredibly tight and is doing real damage to the economy, yet they do absolutely nothing. It boggles the mind,” said one former ECB governor.
“The idea that everything is alright because they are not in actual deflation is a false premise. They are already so far below their 2pc target that it is causing much higher unemployment and making it that much harder for the eurozone periphery to adjust. I am afraid to say that Mario Draghi has been captured by the German political class. He doesn’t want to compromise the support of Angela Merkel’s government,” he said.
Bourses in Europe and the US rallied strongly despite the disappointment but tell-tale fractures in financial markets call for caution. Simon Derrick, from BNY Mellon, said the sharp rise in the Japanese yen - typically the early warning signal for trouble - has echoes of events in the build-up to the Lehman crisis. “Given the huge bubble we’ve seen in emerging markets, the combination of Fed tightening and a hawkish ECB that refuses to act makes this all too like 2007, even if the risks are in a different place. One misstep now could be the trigger,” he said.
Mr Draghi said the ECB’s council had discussed a wide range of measures but needed more information, adding that the “complexity of the situation prevented action at this time”.
Any decision has been kicked into touch until March and possibly longer. Yet delay is risky. Core inflation has already fallen to 0.6pc once tax rises are stripped out. The M3 money supply has been contracting at a 1pc rate over the past three months, against a target of 4.5pc growth.
“They are not fulfilling their basic mandate. They are letting deflationary forces become embedded in the system just like Japan in the 1990s,” said Lars Christensen, from Danske Bank.
“The rhetoric is even the same. The Bank of Japan kept denying that they were going into deflation, and kept insisting that monetary policy was accommodative when it was fact too tight,” he added.
Mr Draghi said the bank is paying “close attention” to the deflation risk, which raises the bar even higher for states in southern Europe trying to push through austerity and structural reform.
However, he denied that the trap is already being set and said the eurozone is not suffering from the same sort of “imported” tightening from the US that hit June last year during the "taper tantrum". This time the ECB policy of forward guidance has served as a shield. “Is there a deflation? The answer is no. We don’t see any similarity with Japan in the 1990s. It’s completely different,” he said.
Mr Draghi said 60pc of the items in inflation basket were falling in Japan at the time. The slide is much narrower in the eurozone, and has not acquired the same “self-feeding” character. “We have to dispense with this idea of deflation,” he said.
Jefferies Fixed Income said a comparable basket for the eurozone was at 20pc in December, rising to 22pc for Italy and Spain, 30pc for France, 49pc for Portugal, 69pc for Cyprus and 85pc for Greece.
Mr Draghi said inflation expectations are “firmly anchored”, although five-year inflation swap contracts have in fact become unhinged in recent months and plunged to a record low of 1.24pc this week.
Nick Kounis, from ABN Amro, said Mr Draghi’s comments smack of complacency. “This seems to be making an assessment of the road ahead by looking through the rearview mirror. A fresh negative shock to the economy would leave the eurozone heading for deflation given that there is currently little [safety] buffer.”
It was the East Asian financial crisis that pushed Japan into dire trouble in 1998. The dotcom bust in 2002 and the Lehman crisis in 2008 both led to a downward lurch in the inflation rate in most Western economies. A shock on such a scale today would tip Euroland into outright deflation within months.
Analysts say the ECB council is deeply divided, with Germany’s two members resisting any move that brings the ECB closer to Anglo-Saxon QE, seen as a slippery slope towards mutualisation of Club Med debt. What is unclear is whether the governors of Holland, Finland and Estonia are still willing to go along with the German line now that their own countries are in or near recession.
The picture is further complicated by the German constitutional court’s ruling on the legality of the ECB’s earlier rescue policies, reportedly delayed until April. It would be courting fate for the ECB to launch radical policies with this Sword of Damocles dangling above, and in the face of stiff resistance from the Bundesbank.
Mr Draghi put to rest the question of whether the ECB can legally buy sovereign bonds given the prohibition on monetary financing of governments in Article 123 of the Lisbon Treaty. “Yes, it’s possible. It’s been done, and it was not against the treaty,” he said, referring to prior purchases of Greek, Irish, Portuguese, Italian and Spanish bonds.
The comments leave the door ajar for full-blown QE in the future if needed as a tool of liquidity management. Mr Draghi said the preferred option is the purchase of asset-backed securities, packaged and traded in blocs. This would ignite the kindling wood in much the same way.
Posts: 12,025
Threads: 1,809
Joined: Apr 2008
Reputation:
227
And here he is again, from The Telegraph
China will seek to pass its deflationary parcel to Europe, the one region that lacks a proper central bank and the governing coherence to protect its own interests
Most of western Europe is already in outright deflation. So are the Balkans, the Baltic states and the old Habsburg core.
The Continent has left its flank open to an external shock from Asia. There is a high chance that this will occur as China attempts to extricate itself from a $24 trillion credit misadventure by debasing its currency to regain lost competitiveness and bail out its export industry.
The yuan has fallen by nearly 2pc against the dollar since early January, and 4pc against the euro. For all the talk of weaning China off chronic over-investment, Beijing engineered a record $5 trillion of investment in fixed capital last year - up 20pc from the year before, and as much as the US and Europe combined.
This has created a vast overhang of excess manufacturing capacity in the global system. It is coming our way in the form of a slow, powerful, deflationary undercurrent.
Europe's headline price data understate the full deflation risk. Eurostat's HICP index "at constant taxes" - stripping out the one-off effects of austerity - shows that 23 of the EU's 28 countries have seen a fall in prices over the past seven months. "The risk of deflation is definitely before us," said Olivier Blanchard, the International Monetary Fund's chief economist.
By this measure, inflation since June has been running at a rate of -1pc in France, -2pc in Holland, Belgium and Slovenia, -4pc in Italy, Spain and Portugal, -6pc in Greece and -10pc in Cyprus. Sweden and Switzerland are also in deflation.
Germany rolled over in July. The UK still clings to a little inflation - now a precious commodity - but it too turned negative in September.
This is a nightmare for the debt-stricken states of southern Europe, still trapped in a slump with mass unemployment regardless of whether they manage to eke out the odd quarter of miserable growth. With Germany at zero inflation, they have to go into even deeper deflation to claw back lost competitiveness within EMU under "internal devaluations".
This, in turn, plays havoc with debt dynamics through the denominator effect. Their debt loads are rising on a base of flat or contracting nominal GDP. It is a key reason why Italy's public debt has risen from 119pc to 133pc of GDP since 2010 despite achieving a primary budget surplus, or why Portugal's debt jumped from 94pc to 129pc (IMF data).
These countries have an impossible task, damned if they do and damned if they don't. Mr Blanchard said their gains in competitiveness risk being overwhelmed by a rise in the "real value" of their debt. "The danger is that the second effect dominates the first, leading to lower output and further deflation."
There is, of course, no magic line when inflation falls below zero. A recent IMF study said the effects become lethal for economies with high public/private debt loads - mostly over 300pc of GDP in Club Med - even at "lowflation" rates.
The European Central Bank is betting that this is downward lurch in prices is a temporary blip due to lower energy costs, insisting that inflation expectations remain "firmly anchored". The collapse of iron ore and copper prices over recent days - on China jitters - should puncture these illusions.
The ECB's expectations doctrine is in any case a Maginot Line. "Long-term inflation expectations on the eve of three deflationary episodes in Japan were also reassuringly positive," said the IMF. Indeed, they were a lagging indicator and therefore useless.
"One needs to act forcefully before deflation sets in," said the Fund, adding that the Bank of Japan was too slow to cut rates and boost the money base. "In the event, it had to resort to ever-increasing stimulus once deflation set in. Two decades on, that effort is still ongoing."
BoJ governor Yasuo Matsushita said as late as January 1998 that there was "no reason to expect that overall prices will drop sharply and exert deflationary pressure on the entire economy". As a result of this lordly certitude, Japan suffered shattering effects when the East Asia crisis entered its second and more deadly phase that summer.
The ECB's Mario Draghi risks going down in history as Europe's Mr Matsushita, as he continues to insist that EMU inflation today is merely where it was in 2009 (in the post-Lehman mayhem) and therefore benign, and that Euroland is not remotely like Japan. "The ECB has taken decisive action at a very early stage of this crisis,” he said.
The proof is in the monetary pudding, and this shows that EMU is already in worse shape than Japan in early 1998 by a large margin. Private lending is contracting at 2.3pc, the M3 money supply has ground to a halt and EMU-wide unemployment is stuck at a near-record 12pc.
The ECB is by definition ferociously tight. Marcel Fratzscher, head of the German Institute for Economic Research (DIW) in Berlin, is right to berate the bank for betraying its primary duty, demanding €60bn of bond purchases each month before it is too late. "It is high time for the ECB to act. Otherwise Europe risks falling into a dangerous downward spiral," he said.
Euro Intelligence said failure to act would be "an existential disaster for the eurozone" and a "shocking derogation" of the ECB's mandate.
Mr Draghi has bent over backwards to assuage the hard-money monks at the Bundesbank - much to the fury of one ex-ECB governor who told me he had become the "captive" of Right-wing German elites - judging that it would be too risky for the Latin Bloc and their allies to mobilize their majority voting power and force through a reflation policy.
His task has become even more complicated since the German constitutional court ruled last month in thunderous language that the ECB’s bond rescue plan for Italy and Spain (OMT) "exceeds the ECB’s monetary policy mandate, infringes the powers of the Member States, and violates the prohibition of monetary financing of the budget”. It also said the OMT is probably "Ultra Vires", meaning that the German Bundesbank may not take part.
The ruling is not final - and does not prohibit ECB bond purchases as such - but it raises the bar for quantitative easing to a punishingly high level. While the Fed and the Bank of England were able to act instantly once it became clear that QE on a huge scale was imperative, the ECB is paralysed by politics, ideology and judges.
There have been dovish mutterings from ECB members over recent days but any action is likely to be confined (for now) to token gestures such as a negative deposit rate or easier collateral rules for banks, not the €1 trillion blast of QE that is so obviously needed immediately. The rise in the euro to €1.39 against the dollar tells us that markets expect nothing of substance.
Europe is left at the mercy of world events. The Fed is pressing ahead with $10bn of tapering each meeting, slowly forcing up the global price of credit and tightening the vice further for emerging markets. The bank has ignored the pleas for mercy from the developing world - still addicted to dollar liquidity - just as it did in the months before the Asian crisis in 1998. The OECD warned this week that the real impact of Fed tapering has "only just begun" and the effects threaten to ricochet back into Europe through trade and banking stress in emerging markets.
China is tightening as well in what amounts to a G2 monetary squeeze. It has been so successful that shadow banking virtually froze in February, prompting the central bank to step back in consternation at its own handiwork.
Some have a touching faith that the Communist Party knows what it is doing, even though it is the same body responsible for just having blown the most spectacular credit bubble of modern times, more than a match for the pre-Lehman booms in Greece, Spain or Ireland in character and much greater in scale. I prefer the Chinese metaphor of feeling the stones beneath the water, their way of saying trial and error.
China will not collapse because the banking system is an arm of the state, but it will have to cope with the colossal malinvestments left from a hubristic five-year blow-off. Deflation is already stalking the country. Factory gate inflation has dropped to -2pc.
We can be sure that China will seek to pass this deflationary parcel to somebody else, just as the Japanese have already done with their epic devaluation under Abenomics. The package will land in Europe, the one region that lacks a proper central bank and the governing coherence to protect its own interests. The implications for the depression-wracked societies of the Mediterranean are nothing less than calamitous.
Posts: 12,025
Threads: 1,809
Joined: Apr 2008
Reputation:
227
04-04-2014, 04:48 AM
(This post was last modified: 04-04-2014, 04:50 AM by admin.)
Prices have been falling at a pace of 6.5pc in Greece, 5.6pc in Italy, 4.7pc in Spain, 4pc in Portugal, 3pc in Slovenia and nearly 2pc in Holland since September, based on my rough calculations (annualised) of Eurostat monthly data.. "The biggest threat to public debt dynamics is weaker-than-expected inflation. Merely lower than expected inflation, not even deflation, would lead to a significant deterioration in countries’ public finances," they said. The bank said lingering "lowflation" would cause debt ratios to surge by 2018, rising 10 percentage points in France to 105pc of GDP, 15 points in Italy to 148pc and 24 points to 118pc in Spain... Reza Moghadam, from the International Monetary Fund, says that even inflation of 0.5pc threatens to "scupper the nascent recovery" in Europe. It aggravates the North-South divide, making it yet harder for the Club Med to claw back lost competitiveness. The debt-stricken states have to carry out even more drastic internal devaluations to regain ground, but that in turn pushes up their debt ratios. "Each point of relative price adjustment must be bought at the cost of greater debt deflation," he said.
ECBs deflation paralysis drives Italy, France and Spain into debt traps - Telegraph
Posts: 12,025
Threads: 1,809
Joined: Apr 2008
Reputation:
227
While eurozone bond yields hit new lows, action is hampered because of, well..
The simmering row between the European Central Bank president Mario Draghi and the German Bundesbank president Jens Weidmann is sometimes painted in personal terms, but in fact it epitomises a wider difference between the hawks and the doves on the ECB governing council. It is important to understand the anatomy of this dispute as the central bank prepares for its next critical meeting on December 4.
The dispute is fundamental and longstanding. Mr Draghi has adopted the New Keynesian approach that dominates US academia and central banking. There is really no difference between the philosophy that underpins his latest speech and that of Ben Bernanke, vintage 2011-13. In contrast, recent remarks by representative hawks such as Mr Weidmann and ECB executive board member Yves Mersch stem directly from the Austrian school of European economics. It is no wonder that these differences are so difficult to bridge.
To start with a point of agreement, both sides accept that the ECB is failing to hit its inflation objective, and both admit that this is a serious issue. However, there is a major difference in the urgency attached to this. Mr Draghi says that inflation must be raised “as fast as possible” because “the firm anchoring of inflation expectations is critical under any circumstances”.
In contrast, Mr Weidmann says that “a problematic wage-price spiral is still a remote prospect”, and adds that “monetary policy matters should be considered with a degree of calm”. That is presumably why the Bundesbank president voted against the monetary easing announced by the ECB in September, though he did support the consideration of further unconventional measures, as announced by the GC in November.
On the content of these measures, there seems to be an even wider gulf between the two sides. This starts with the size of the ECB balance sheet. Mr Draghi says that both the composition and the size matter. He explains that “the magnitude of portfolio balance effects is a function of the size of the central bank’s balance sheet … the greater the purchases, the greater the displacement across asset classes”. He also points to the beneficial “announcement effects” on inflation expectations and the exchange rate, which explain why he is seeking to give the impression that the ECB has a specific target of returning its balance sheet to its size as of March 2012. All this is pure Ben Bernanke.
The GC has, however, prevented its president from formally adopting the balance sheet number as a “target”. It is merely an “expectation”, as Mr Weidmann is reported to have pointedly commented the day after the last ECB meeting. Furthermore, Mr Mersch adds that the size of the balance sheet is “neither an end in itself nor a fetish”. Instead, he describes the recent ECB measures as merely “credit easing”, designed to improve the efficiency of the bank’s credit channel. That is very different from Mr Draghi’s emphasis on the announcement effects of the size of the balance sheet.
On the prospects for further measures, Mr Draghi says that if current policy is “not effective enough” then the ECB will “alter accordingly the size, pace and composition of our purchases”. Mr Mersch concedes that the GC has unanimously agreed that more could be done if needed, and says that “theoretically” this could include purchases of “government bonds, gold, stocks and ETFs”. The mention of gold has raised some eyebrows among macro investors, but it is hard to believe this is a serious suggestion.
Much more important is the mention of government bonds. This is where both Mr Weidmann and (probably) Mr Mersch draw the line. Both say, as usual, that this risks “moral hazard”, reducing the incentive for governments to achieve debt sustainability and pursue structural reforms. Both also say that it is “questionable from a legal point of view”. This directly conflicts with Mr Draghi’s repeated claims earlier this year that the GC was unanimous in its opinion that sovereign debt purchases fall within the ECB’s mandate.
Mr Mersch has analysed government bond purchases in some detail, saying that they could have beneficial portfolio balance effects by lowering bond yields. But he warns that these are not very important in the euro area because of the dominance of the banking channel, rather than the bond market, in corporate lending. He also warns that allowing fiscal interests to dominate the central bank’s thinking could force the latter to allow inflation to rise in order to hold interest rates down.
In his latest speech, Mr Draghi adopts a simple strategy in responding to these points: he does not mention them at all. His silence on this matter is deafening. Instead, he focuses all his rhetorical firepower on the size of the balance sheet, agreeing that “there are certainly question marks as to how strong these effects are in the euro area”, but then concluding “there is no question as to the sign of the effects – it is clearly positive”.
Where does this leave the ECB?
-
The ECB president has now, in effect, publicly stated that the unhinging of inflation expectations needs to be corrected urgently. The hawks, however, do not see this as being so urgent.
-
Mr Draghi believes it is important to have a balance sheet target, while the hawks reckon that a much softer “expectation” is enough.
-
The president probably thinks that in order to persuade the markets that the balance sheet will increase rapidly, purchases should be widened to include other private assets, like corporate bonds and government bonds if necessary. The hawks believe that any assets purchased must involve no credit risk for the balance sheet, and think that government bond purchases involve both credit risk and moral hazard, as well as being ineffective.
It will be an interesting meeting next week. Now that Mr Draghi has nailed his colours to the “urgency” mast, a complete absence of new action would be a serious defeat for him. Purchases of corporate bonds, along with a shift from a balance sheet “expectation” to something closer to a “target” (maybe a “reference value&rdquo would be a typical ECB tactic.
It seems unlikely that purchases of sovereign debt will be announced next week. This will need to wait until the decision of the European Court of Justice early next yearon the legality of such purchases. It may also need Mr Draghi to call on the tacit or public support of Chancellor Angela Merkel – assuming, as he recently hinted, that he has this in his back pocket for emergencies.
|
