February 27, 2021

Lagarde will keep the risk premium kidnapped


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The ECB has already advanced that this Thursday it will expand aid in a context of recession hardened by the second wave of the pandemic and without shame already in the transfer of its strict mandate, which refers exclusively to inflation. And on the table of the governing council of the European issuer, its president will put a whole catalog of possible measures, which goes well beyond the much-handled bond purchases and the well-known liquidity lines. The ECB’s chief economist, Philip Lane, has acknowledged that he will arrive with reports on other lines of action. “We are not only seeing two programs,” he said at the Reuters Global Investment Outlook Summit, adding that “there is a wide range of policies with respect to collateral, with respect to ‘swaps’ and ‘repos’, And a long etcetera”. These creative possibilities suppose alternative courses of action and unrelated to pressure from the Bundesbank, uncomfortable with the huge debt purchase programs and with the tight situation to which the zero-rate policy condemns the banking sector.

Lane, on the Lagarde line, argues that the Pandemic Emergency Purchase Program (PEPP) of 1.35 million euros and the bank liquidity service of Long-Term Refinancing Operations (TLTRO) have been very effective and that they will continue to be the backbone of the monetary policy package, but adds that the ECB could also help banks by increasing the amount of their mandatory reserves exempt from negative deposit rates, while noting that a further rate cut It is unlikely.

It does not rule out changes in the Asset Purchase Program, since “its flexibility is more appropriate to the context of the pandemic. If we can keep financing conditions where they are now, at a low level, that would contribute to economic recovery, ”he suggests, and downplays the importance of four consecutive months of downward inflation, attributing much of the drop in prices to the vital loss of the economy. “Once activity recovers, the very low prices in the most affected sectors will be relatively reversed,” he trusts, although he assumes that the effective deployment of the vaccine will take more than a quarter and, therefore, the year 2021 as well. will be affected.

The The pandemic will also have, according to the ECB’s chief economist, lasting structural effects, in sectors such as construction, and a loss of vitality that will take time to recover, so the ECB must think about sustainable action measures in the medium and long term. «So many people have worked less this year that in terms of experience, accumulation of skills, plus loss of income, will play a very negative role, ”he predicts, thus reinforcing the expectations of the markets, which are counting on the ECB to provide a forceful response today, of at least half a billion euros in the PEPP and an extension from June 2021 at least December of that year, in addition to new extraordinary rounds of liquidity for banks beyond the last one approved for March 2021.

Lagarde intends to make it clear that the ECB will continue there, supporting the euro economy and financing the Member States. Until now, banknote printers have been fuming and some 700,000 million of the total of 1.35 trillion of the PEPP have been consumed and the balance of the ECB is in the 7 trillion euros, the equivalent of 68% of GDP, doubling the ratio of the US Federal Reserve Portugal, rescued in 2011, has now seen the yield on its ten-year bonds fall into negative territory, like Ireland. Spain is approaching that papier-mâché landscape of negative long-term debt. Ten-year Treasury bonds yield only 0.017%, unthinkable, completely artificial in the OECD country with the biggest drop in the economy this year, with a public deficit close to 15% of GDP and a public debt higher than 120% . This artificial state of the economy, while the State continues to borrow as if there were no tomorrow, benefits financial assets, awakens investors’ appetite for risk, who anticipate a recovery that is still far from real, but prevents that euro governments abide by a reasonable and effective handling of the crisis and ignores the German voices who repeat that aid “must be prolonged as long as necessary and cut as soon as possible.”

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