炉石血帆海盗卡包:The ECB, eternal and infinite (2)

Indeed, total ECB lending is now almost as large, in absolute terms, as the Fed’s first, and largest, round of QE.  Some analysts say banks may simply use the money to put on a carry trade by buying back their own debt or higher-yielding corporate or government debt. But does it matter? If they do, the ECB has taken long-term risk assets out of the market, raising private demand for the stuff that remains. That’s precisely what the Fed is trying to achieve through QE.

This raises two questions: economically, does it work? And politically, does it make sense? On the first, it might stand a better chance than you think. In America credit is priced off the risk-free rate, so if a Treasury yielded 6%, mortgages would cost 8%. But the essence of Europe’s debt crisis is that sovereigns are being reclassified from risk-free to credit. It is conceivable, then, that sovereign yields may decouple from the interest rates charged to households and companies.

Between the end of May and the end of October, the 10-year Italian government bond yield rose 140 basis points, to 6.19%. In the same period, the average rate on new household mortgage rates rose only 45 basis points, to 3.54% (based on Bank of Italy data which is only available through October) and the average new business loan rate rose about 75 basis points, to 3.74% (part of this was due to a rise in the ECB’s policy rate which has since reversed). Ignazio Visco, the bank’s new governor, said on December 9th, that higher bond yields were “being passed through to the cost of finance to the private sector and the spending plans of households and firms, thereby diminishing the domestic component of aggregate demand”. Still, between May and October, total loans to households and businesses rose, albeit by only 1% each. Yes, Italian GDP did contract 0.2% in Q3, and while tightening credit may have played a part, austerity may be the bigger culprit: public consumption declined 0.6%.