Fra Natixis:
Could the ECB do “very unconventional” things that it is not doing now?
Author: Patrick Artus It is sometimes suggested that the ECB should conduct even more unconventional policies than it is doing now with, in particular, two possibilities that are often mentioned:
• Helicopter money, direct distribution of money to economic agents, without purchases of financial assets in exchange. But it is easy to show that a large part of the ECB’s current quantitative easing is already helicopter money;
• Cancellation of the public debt that is on euro-zone central banks’ and the ECB’s balance sheets; but it is easy to see that in all countries where central banks return their profits to governments, the public debt purchased by the central bank is de facto cancelled.
“Very unconventional” monetary policies are in reality already in place in the euro zone. This shows that in reality, the ECB’s balance sheet is already very destabilised.
Could the ECB forever prevent the bond bubble from bursting?
Author: Patrick Artus The ECB’s very expansionary monetary policy has led to a bond bubble in the euro zone. A large consensus currently agrees that a bursting of the bond bubble would have very dangerous effects on borrowers and investors.
But could the ECB prevent the bond bubble from bursting? We must draw a distinction between two cases: • An across-the-board rise in long term interest rates in the euro zone, which could be triggered either by a rise in interest rates in the United States, or by a return of inflation (rise in the oil price, for example); in this case the ECB could still prevent euro-zone longterm interest rates from rising by buying the required quantity of bonds through the quantitative easing programme;
• A rise in the sovereign risk premia on some (peripheral) euro-zone countries, if concern about the euro zone’s solidity reappears (for example if there is a Brexit, if some countries’ economic situation deteriorates, if there is a political crisis, etc.).
The situation would then be far more complex since the ECB could not use quantitative easing but would have to use the OMT, which means that the country (countries) concerned would fall under the European programme (loan from the ESM, conditions in terms of economic policies and structural reforms) with the related problems which we are currently seeing in Greece.
