This was the most easing Draghi could get and still achieve unanimity


This is a brief update to my last member post from this morning. Just reviewing what the ECB has done here, we see them taking four out of the five easing measures I outlined in May.

  1. The ECB could lower rates. Check
  2. The ECB could allow its balance sheet to rise. The ECB has been sterilizing the 170 billion euros of government bond purchases it previously made during the European sovereign debt crisis. It could allow these purchases to become unsterilized. I didn’t mention this measure in the last post. But the ECB has done this as well. So check
  3. The ECB could charge banks for holding reserves, essentially taxing them for having reserves. Check
  4. The ECB could also actively look to purchase assets to expand its balance sheet, whether those assets are government or private sector bonds. This is QE and the ECB has not done this.
  5. The ECB could set up another low rate credit facility for banks but with the specific mandate for banks to increase lending to SMEs and households. Check
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Now in terms of lending to SMEs, in May I felt the ECB could take another measure – asset-backed securitisation of SME loans – instead of the LTRO vehicle they did choose. But when I saw the vehemence of the German reaction against easing, I started to think that might have been a step too far. And as we now see, it was.

Frankly, the ECB was as aggressive as it could get. And I understand now that Bundesbank’s head Jens Weidmann voted for these measures. That’s a big deal. It says that Mario Draghi struggled and struggled for the last six months to get a unanimous decision on policy just as I had been saying. And indeed he was able to get unanimity. This will be good in terms of blunting the impact in the German media somewhat.

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QE is still beyond the pale for the Germans though. That would be considered monetisation and that’s why it hasn’t been implemented. If things get worse the ECB will turn to a securitization program though. The benefit here would be that it could help as a back door bank bailout via a balance sheet deleveraging. We aren’t there yet. If the data on inflation continue to disappoint we will be there. And I believe the ECB will take action and do the program whether Weidmann is onboard or not.

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