StockBeat: Mission Creep on the ECB

© Reuters.

By Geoffrey Smith – The European Central Bank will extend its emergency purchase program at its Governing Council meeting on Thursday.

Economists believe that the € 1.35 trillion “envelope” for the pandemic emergency purchase program will be expanded by € 500 billion and that the central bank will extend the horizon for purchases under the program by six months or even twelve months will add a language that opens the door to further expansion.

Some people will take a positive view of this – especially if they own eurozone government bonds (basically eurozone banks and insurers). Expectation that the ECB’s already massive presence in this market will stifle has pushed yields on Portuguese debt below zero for the first time this week, while Spain’s yields are at zero. Of course, both countries almost left the euro zone nine years ago because of crippling debt problems.

However, it is difficult to see what is positive about another incident, where an emergency response, which should be temporary, is gradually turning into another integral part of the policy. Especially if the result is to show beyond any doubt that the natural, risk-free return on investment in Europe is now negative.

The ECB likes to focus on the signals it wants to send. It likes to show that it is not “without ammunition”, but is able to influence the results. However, the toolkit is simply not appropriate for the current situation.

“Talk of stimulating an economy when governments are trying to slow economic activity for public health reasons is not particularly helpful,” Paul Donovan, chief economist at UBS Global Wealth Management, said on a morning podcast. “We are not facing a credit crunch. Instead, governments have locked up money for businesses and consumers, and structural changes are driving parts of the economy into ultimate decline. “

Certainly the ECB still has a role to play in organizing the financial markets – and it is undeniable that the PEPP did just that during the Spring Panic. But what it’s doing now is nothing like whatever top management thinks. In an interview with Bloomberg last week, board member Isabel Schnabel described the bond markets as “calm”. With all due respect to Ms. Schnabel, they are not “calm”, but are fundamentally distorted by a central bank that will own almost half of the eurozone’s national debt by the end of the PEPP.

When the time finally comes, the bank will no doubt still claim that it has not broken the principle of cash financing, even though today’s measures are specifically designed to finance a second year of sky-high budget deficits. Heaven forbids the market to decide the real price of Portuguese or Spanish sovereign risk in today’s circumstances. Or last year. Or next year. Or the year after.

The ECB has already killed pricing for sovereign risk. It’s just a small step away from doing the same with personal credit risk and flirting with programs that penalize some activity and reward others under the guise of an initiative to curb climate change – as if that could somehow offset growth in emerging oil demand or the destruction of the Amazon (NASDAQ 🙂 rainforest.

Today’s decisions are all part of the same pattern. The ECB cannot admit the limits of what a central bank can or should do and succumbs to missionary sneaking. It tries to solve crises it cannot solve and fears that it will lose the extraordinary privilege of political independence if it does so little.

It is only fair to say that the bank officials have the best of intentions and have said for years that they cannot be expected to do things that governments should do. Nevertheless, the blatant contradictions in his politics are becoming more and more difficult to ignore. It cannot and will not end well. The only consolation is that final settlement can still be pushed past the relevant time horizon of most investors.

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