The ECB Continues To Incentivize Reckless Behavior

Sunday, June 9, 2019
By Paul Martin

by Daniel Lacalle,
ZeroHedge.com
Sun, 06/09/2019

The European Central Bank continues to disproportionately inflate the debt bubble of the Eurozone, while the economic slowdown of the main European economies worsens. What was designed as a tool for governments to buy time in order to carry out structural reforms and reduce imbalances, has become a dangerous incentive to perpetuate the excessive spending and increase debt under two very harmful and wrong excuses: That there is no problem as long as debt is cheap and that there’s no inflation.

1.Cheap borrowing is not an excuse to increase debt. Japan has a very low cost of debt and the cost of servicing Japan’s public debt is almost half of the state’s tax revenues. Japan’s debt is 15 times higher than the tax revenue collected by the government in 2018.

2.The Eurozone official inflation since 2000 shows an increase of 40% in CPI while productivity growth has been negligible and salaries and employment remain depressed.

Monetary policy has gone from being a tool to support reforms to an excuse for not implementing them.

We must remember that the euro is not a global reserve currency. The euro is only used in 31% of global transactions, while the US dollar is used in 88%, according to the Bank Of International Settlements (the total sum of transactions, as the BIS explains in its report, is 200% because each transaction involves two currencies).

Bond yields in the Eurozone are artificially depressed and give a false sense of security that is completely clouded by extremely low interest rates and excess liquidity.

The balance sheet of the European Central Bank has been inflated to be 40% of the GDP of the Eurozone, while at the peak of quantitative easing the Federal Reserve’s balance sheet did not reach 26% of the US GDP.

The Federal Reserve Treasury purchases never exceeded net issuances. The ECB continues to buy back bonds once they mature despite having multiplied the repurchases and having reached seven times the figure of net issuances .

Sixteen 10-year sovereign bonds in the Eurozone show negative real yields. Greece and Italy, the other two, are amazing examples, as their yields (adjusted for currency and inflation) show a negligible differential over the US ten-year bond.

Excess liquidity in the Eurozone exceeds 18 trillion euros.

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