January 19, 2021

Council members warn that the ECB may be financing governments

Correspondent in Berlin



He Governing Council of the ECB they unanimously agreed at the last December meeting on the need to strengthen the monetary stimuli in force, given that the inflation target is delayed over time and to guarantee optimal financing conditions in a generalized context of economic deterioration. But the minutes of that meeting reveal that the ECB’s governing council maintained a first discussion about the possibility of reducing the purchase level bond.

Some of the council members suggested that, precisely in times of uncertainty, it might be convenient to leave some powder in the bag, leave a margin based on previous purchase decisions. Concerns were also raised that the massive liquidity injected by the ECB into the euro economy will be effectively translated into financing for companies and individuals. The minutes contain references to the fact that this effectiveness not only depends on the supply of credit but also on the demand and the mention has been expressly transcribed “Of the high level of savings of companies” and the possibility that they are satiated with liquidity, as a preventive measure. It was clear that several members of the council agree that, on the part of the credit offer, banks can divert the liquidity offered by the central bank to the purchase of sovereign debt, with which the ECB would be indirectly financing governments of the euro.

At that meeting, the ECB finally agreed expand by 500,000 million euros its extraordinary debt purchase plan and extend it until March 2022, while the reinvestment of securities that mature until at least the end of 2023 is prolonged. The ECB also decided to reinforce the TLTRO III liquidity lines for banks. .

The chief economist Philip Lane initially proposed an increase in the stock of the computable loan portfolio to request liquidity for an equivalent volume on TLTRO lines from 50% to 60%, after it had previously risen from 30%. But there were discrepancies as to whether the bank’s dependence on the ECB as a source of financing could rise excessively since “Could induce banks to invest more in sovereign debt”. Finally, it was agreed to establish a new percentage at 55% and not at 60%.

The increase in debt purchases was supported by a majority and the main discrepancies referred to its magnitude. Some members of the Governing Council were in favor of “a more moderate increase”, arguing that “there is still enough space available for acquisitions from past decisions and in the environment of high uncertainty it was worth being cautious to maintain the option to do more adjustments in the future. ‘ Others, on the other hand, defended a greater increase in debt purchases because they considered that the 500 billion euros that Lane had proposed were “insufficient” to further relax financial conditions and get inflation to rise. Lane’s intermediate proposal triumphed, up to 1.85 billion euros.

270,000 million debt with the ECB

The debt of Spanish banks with the ECB touched 270,000 million euros in December, which means doubling requests for funding made by the entities to the issuing institute one year before. The gross appeal of the Eurosystem as a whole to the ECB reached 1,775 billion euros in December, 1.18% more than the previous month and up to 174.8% in the annual comparison. The requests of the Spanish entities represented approximately 12.7% of the total the last month of 2020.

Regarding the aggregate volume of assets acquired in Spain within the framework of the different asset purchase programs implemented since 2009 by the ECB, it was 469,488 million euros in December, 2.96% above the previous month and 41.27% higher in year-on-year terms. The ECB bought 120,000 million Spanish debt in 2020, the equivalent to the country’s net emission during that year.

In the Eurosystem as a whole, the aggregate amount of asset purchases in the last month of 2020 reached a total of 3.68 billion euros, 2.87% more than a month before and 39.92% higher than December 2019. According to data from the Bank of Spain, the aggregate volume of asset purchases in Spain represents 12.74% of the total corresponding to the Eurosystem’s consolidated balance sheet, one tenth above the previous month’s figure. This unprecedented intervention has allowed the interest rates paid by the Spanish government for issuing debt have fallen to historical lows. The Spanish ten-year bond has even paid negative interest, despite the fact that Spain’s public debt stands at 114% of GDP, its highest level in more than a hundred years.

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