“Possibly morally questionable.”
There SEB:n the chief strategist Jussi Hiljanen an assessment of the purchase program planned by the ECB for indebted southern European countries.
In its recent review, SEB analyzes the ECB’s attempt to fix the structural problems of the currency union, which resurfaced as inflation accelerated and financial conditions tightened.
It is easy to agree with the view.
Presumably, in the “anti-fragmentation instrument” (AFI) presented at the July meeting, the ECB will continue quantitative easing at least partially and reduce the incentives of crisis countries to intervene in the real problems of their economies.
Quick review. After the euro crisis, the European Central Bank started quantitative easing, where it buys countries’ securities. The purpose was to stimulate inflation and economic growth and calm the interest rate market.
The ECB somehow succeeded in these. At the same time, however, the central bank’s balance sheet more than quadrupled from EUR 2,000 billion to EUR 9,000 billion. As a byproduct, asset values swelled and inflation sensitivity increased.
When expectations of an ECB interest rate hike intensified this spring, investors rekindled old concerns about Italy’s ability to pay its growing interest expenses.
The country’s government bond interest rate rose to 3.7 percent in June, after being 1.2 percent at the beginning of the year. At the same time, the interest rate difference with the German government bond increased, which indicates an increase in the perceived riskiness of the Italian government bond. Investors sold off Italian debt.
Italy has a national debt of more than 150 percent of GDP, and the country’s political field is in motion again.
With the speculation, the ECB ran away. The central bank said that it can immediately use the PEPP purchase program for the pandemic period, which it has already ended, flexibly: it can therefore channel maturing loans from strong euro countries into new purchases of loans from crisis countries.
In this way, the ECB’s balance sheet does not grow. The central bank can therefore still state that it has ended quantitative easing in July, as it has previously promised.
In the planned new AFI program, the central bank can also increase its balance sheet. According to SEB, the conflict that arises with ending quantitative easing would be handled, for example, by the ECB “sterilizing” the purchases. It sucked liquidity from the market to the extent of purchases by attracting deposits from banks at a favorable interest rate.
In fact, this was already done once, in the Securities Markets crisis program (SMP) after the financial crisis.
Italian government bond the interest rate fell by almost a percentage point as a result of the ECB’s exit, although the details of the new program are open.
So everything is fine? The problem is that, while the new measures may calm the market, they keep troubled economies stuck in the recovery hoses. The need for painful reforms is decreasing.
The ECB’s repayment jungle, on the other hand, is growing: LTRO, TLTRO, SMP, EMS, OMT, APP, PEPP, AFI. The euro area cannot get out of the exceptional times.
The question also arises as to why the new program is even needed. The former CEO Mario Draghin OMT, launched in 2012 around the time of the whatever it takes speech, might now serve as a light version for Italy.
A program not tested during the Eurocrisis would be difficult to sell politically. That would sound like we have a crisis on our hands.