Thursday, January 22, 2015

Eurozone QE - making a bad problem worse?

So after much gnashing of teeth the ECB has finally capitulated and is going to start buying government bonds from the market in a desperate attempt to be seen doing something useful. 
Of course they have swallowed the line that somehow this is going to increase bank lending across the continent and generate a 'wealth effect'. Of course it isn't because they have their causalities completely the wrong way around. 
However the string pushing will no doubt continue until morale improves.
But there is an 'interesting' artefact about to happen due to the way they are planning on structuring their purchases.…
Eurozone QE - making a bad problem worse?
Neil Wilson


Matt Franko said...

Neil breaks down the distributional aspects of this form of fiscal drag (ie QE) based on the ECB capitalization and sovereign rates.... nice work Neil.....

sths said...

So 60 billion a month means 720 a year. ECB capital subscription for Germany is 18% and Greece 2%.

So Germany will get 130 billion and Greece will get 14.4 Billion.

German 10 year interest rate is 0.54% which means they will pay ECB 702 million.

Greece 10 year interest rate is 9.22% which means they will pay ECB 1.3 billion.

Sorry if this is a dumb question but is this what Neil is saying?

NeilW said...

All the NCBs have to buy bonds in proportion as far as I can tell from the limited amount of data the ECB is putting out.

So that means it is the same as if the ECB had bought the whole amount.

The income the ECB gets from Greece is proportionally more than from Germany for the set amount of money deployed in that area.

What they should have done is targeted the German rate for the 10 year bond across the Eurozone and bought all the others to force the rates to harmonise. That would mean Germany sells mostly to private sellers and everybody else sells proportionally to the ECB.

But they're still reading from the monetarist bible, so don't get it yet.