The ECB plans for ever more QE and lower interest-rates

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by Shaun Richards

Yesterday brought news that there is plenty of work ahead for the European Central Bank or ECB. It came from the European Commission and the emphasis is mine.

The Commission has today taken steps to ensure that borrowing under the temporary recovery instrument NextGenerationEU will be financed on the most advantageous terms for EU Member States and their citizens. The Commission will use a diversified funding strategy to raise up to around €800 billion in current prices until 2026.

Interesting that they claim to know what future bond markets will be doing, but I was already expecting that the ECB will be brought in to buy at least some of the bonds. The borrowing will be large in annual terms and any repayment is kicked safely into the very long grass. The choice of 2058 looks to be driven by the fact that the ECB only buys bonds up to the 30 year maturity.

This will translate into borrowing volumes of on average roughly €150 billion per year, which will make the EU one of the largest issuers in euro. All borrowing will be repaid by 2058.

Then we got confirmation of the role of the ECB in this.

EU will create liquidity buffer at the ECB as part of recovery fund to ensure funding needs are always met – EU official  ( @PriapusIQ )

Ah so “liquidity buffer” is what it is called now! Regular readers will be aware that this fulfills two of the themes we have. Firstly the ECB is increasingly the buyer of first resort for Euro area debt with the kicker that “liquidity buffer” sounds like a euphemism for edging closer to buying in the primary markets. Next that the PEPP capacity ( 1.85 trillion Euros)  will be used, in spite of the regular claims that it may not be. After all at 960 billion it is already much larger than the original plan.

The Governing Council decided to increase the initial €750 billion envelope for the PEPP by €600 billion on 4 June 2020 and by €500 billion on 10 December, for a new total of €1,850 billion.

I suspect it will turn out to fulfill the definition of temporary in my financial lexicon for these times as well.

The PEPP is a temporary asset purchase programme of private and public sector securities.

There was also this in the announcement.

This will also attract investors to Europe and strengthen the international role of the euro.

This is curious as they already have plenty of opportunities to buy Euro area debt should they wish. Also the Euro is widely traded. Perhaps they mean that international investors will be attracted by the ability to front-run the ECB and make an easy turn. Language can be loose here because as I was looking at the debt issuing vehicle the European Stability Mechanism or ESM I spotted this in today’s blog from it.

As a result, the Greek economy was structurally more resilient at the start of the pandemic than it was prior to the sovereign debt crisis.

Really? The economic collapse was on top of a contraction of 20% or so previously. Also the debt to GDP ratio is now north of 200%. Plus the blog seemed to be trying to have its cake and eat it by lauding austerity.

 Past consolidation efforts, though quite painful, enabled the country to enter the pandemic with a very healthy budgetary position.

But also fiscal stimulus.

This allowed the government to combat the effects of the current crisis with countermeasures amounting to approximately 9.4% and 6.5% of GDP in 2020 and 2021, respectively.

This confusion over whether debt and deficits are bad was repeated by the man running this show which is Klaus Regling of the ESM.

And some like to compare the numbers in Europe to the US, but they are comparing apples and pears, I think, because the fiscal deficit, that’s true, is jumping up a lot more in the US, which, by the way, also means that the debt levels in the US are higher than in almost all European countries now.

So debt is apparently bad here rather than strengthening the international position of the Dollar or enhancing growth.

Backwash

These days central bankers try to tell politicians what to do as this from ECB Vice President de Guindos yesterday shows.

 It is therefore of the utmost importance that the NextGenerationEU plan becomes operational without delay, as it would allow Member States to restart their economies, enhance their resilience and foster innovation.

As an aside the use of “resilience” is always a sign of trouble. For example we are regularly told the bodies below are resilient.

For example, the profitability outlook for banks remains weak as lower-for-longer interest rates dent margins and structural challenges persist.

Returning to the main point things are really rather awkward as an ex-politician now posing as an independent central banker tells current politicians what they should do.

The Digital Euro

This has been gaining news recently and this started with Isabel Schnabel a week ago. She opened this section by getting her retaliation in first.

In our view it is wrong to describe bitcoin as a currency, because it does not fulfil the basic properties of money. It is a speculative asset without any recognisable fundamental value and is subject to massive price swings.

That left her open to this response.

Currencies such as the euro don’t have any intrinsic value either, but are simply based on trust.

The euro is backed by the ECB, which is highly trusted. And it is legal tender. Nobody can refuse to accept euro. Bitcoin is a different matter.

I am sure the ECB is highly trusted in her circles as it provides well paid employment but beyond that? Well it gets worse because whilst Facebook has had issues the rise of Bitcoin clearly shows people are willing to take quite a risk to avoid central banks.

They are surely more likely to trust the ECB than Facebook or other private operators.

Board member Panetta was on the case yesterday and I note he seemed to get in a tangle on the privacy issue.

Let me emphasise, first of all, that a digital euro would in fact increase privacy in digital payments. As a public and independent institution, the ECB has no interest in monetising or even collecting users’ payment data.

Okay so it will be pretty much completely private. But only a few sentences later we get this.

Digital euro payments could guarantee different degrees of privacy[7], involving different trade-offs with other policy and regulatory objectives such as the need to combat illicit activities.

Comment

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Even though the headline measure seems a bit stuck with the Deposit Rate at -0.6% and of course money available to banks at -1%, there is quite a bit going on at the ECB. It’s role of supporting fiscal policy means that its QE bond buying looks ever more like a treadmill it cannot turn off. Or a President Lagarde put it in an interview with CNBC last week.

We may well reduce the pandemic emergency programme when the time comes, when we see the crisis coming to an end. Yes, but that’s the emergency programme. We also have another programme of asset purchases. And as I said, net asset purchases will continue until we start looking at raising policy rates.

So the EU Recovery Fund seems set to provide even more bonds for it to buy although of course it has yet to be ratified and is progressing at a sedate and indeed stately place.

It’s backstop looks ever more like being the digital Euro which as I explained back on the 11th of February.

ECB‘S Panetta: Minus 1%-2% Remuneration On Digital Euro Could Not Be Enough To Prevent Capital Flows Out Of Banks In Crisis

Perhaps the -3% suggested by the IMF?

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