On September 4, ECB President pulled out a financial bazooka including a pledge to build up the ECB’s balance sheet by another €1 trillion.
Draghi confirmed the asset purchases would “include the real estate, the RMBS, real estate ABS. It would also include a fairly wide range of ABS containing loans to the real economy,” but only “the senior tranches, and the mezzanine tranches only if there is a guarantee.“
Now, just three weeks later, he wants to buy outright junk, presumably without guarantees.
Mario Draghi is to push the European Central Bank to buy bundles of Greek and Cypriot bank loans with “junk” ratings, in a move that is set to exacerbate tensions between Germany and the bank.
The ECB’s executive board will propose that existing requirements on the quality of assets accepted by the bank are relaxed to allow the eurozone’s monetary guardian to buy the safer slices of Greek and Cypriot asset backed securities, or ABS, say people familiar with the matter.
However, the idea is likely to face staunch opposition in Germany, straining already tense relations between the ECB and officials in the eurozone’s largest economy.
Bundesbank president Jens Weidmann, who also sits on the ECB’s policy making governing council, has already objected to the plan to buy ABS, which he says leaves the central bank’s balance sheet too exposed to risks.
Wolfgang Schäuble, Germany’s finance minister, has also voiced his opposition, saying purchases would heighten concerns about potential conflicts of interest between the ECB’s role as monetary policy maker and bank supervisor.
While the safer slices – or senior tranches – of Greek and Cypriot ABS only make up a tiny proportion of Europe’s securitisation market, it would free up billions in liquidity for banks in two of the eurozone’s weakest economies, and potentially boost lending to credit-starved smaller businesses in the currency area’s periphery.
Free Up Liquidity?
The idea that swapping money for junk will free up liquidity is as ridiculous as moving a rotting fish from your pantry to the living room in hopes the stench will go away.
In this case, the stench on Greek bank balance sheets will not go away. Instead, stench will also appear on the balance sheet of the ECB.
And it will not do a thing to spur lending for the same reasons as noted in ECB’s €1 Trillion Stimulus Gamble: ECB Pulls Out Bazooka, Cuts Rates, Buys Assets; Will this Stimulate Lending?
Here’s the key snip.
Will this Stimulate Lending?
Everyone wonders if this will work. Let me ask a different set of questions:
- Why should it?
- Does the announcement fix any structural problems with the euro?
- Does the announcement fix any fiscal issues in any European country?
- Does the announcement fix any competitive disadvantages of France vs. Germany?
- Does this provide any impetus for structural reforms in France or Italy?
- If -0.1% rates for funds parked with the ECB did not stimulate lending, why should -0.2% rates?
Draghi Creates Bond Bubble
All Drahghi really accomplished with LTRO is to make Europe the biggest bond bubble in the world.
Well bubbles can always get bigger, until they pop.
Meanwhile none of these can-kicking efforts have fixed a single structural problem. Instead, they made it easy for governments to delay needed reforms.
Forcing Banks to Lend a Huge Mistake
These attempts to force banks to lend is a huge mistake. Banks lend if and only if …
- Banks are not capital impaired
- Banks believe they have credit-worthy borrowers
- Credit-worthy borrowers want credit
If banks lend in other circumstances, they will incur losses. They also incur losses if they believe they have credit-worthy customers but they don’t.
The problem should be obvious. European banks lack credit-worthy borrowers who want loans, or the banks are capital impaired.
I suggest both.
And if this move by Draghi does spur more lending to small uncreditworthy businesses, the ECB will have done nothing but compound Eurozone problems greatly.
In response to the above post, a director at a global financial company pinged me with …
Mario Draghi is an idiot. Banks create money when they lend. The loans create a requirement for reserves which ultimately reverts back as deposits at the ECB. The negative interest rate is therefore a tax on capital and a tax on lending. This not rocket science.
I’d start a charity whereby every newly appointed central bank board member is sent a free copy of Rothbard’s Mystery of Banking except I am beginning to doubt their ability to read.
These actions by Draghi prove he is clueless about how the system even works.
Mike “Mish” Shedlock