Although the ECB vehemently denies that it’s following the US Federal Reserve policy of Quantitative Easing – the facts reveal that the ECB may be fibbing.
On February 29th 2012, the European Central Bank (ECB) will issue its second round of so-called “unlimited three year loans” – which are loans with unusually low interest rates, just 1% – and are intended to flood the Eurozone banking system with cheap money to help avert a credit crunch like the one seen in the US after the collapse of Lehman Brothers in 2008.
It’s expected that up to 1 trillion euros could be injected into the Eurozone banking system.
With the last round of unlimited loans, issued in December of 2011 leading to nearly half a trillion euros being pumped into Europe’s financial sector, and up to 1 trillion euros expected to be injected on February 29th – it begs the question of how this is anything but quantitative easing on behalf of the ECB.
First we need to be clear on exactly what we mean by “Quantitative Easing” or QE. According to investopedia.com, “Quantitative Easing” is:
A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity.
Well, what exactly is the ECB is doing?
The ECB is technically forbidden to bail out the troubled Eurozone countries by buying their bonds directly – so what’s the next best solution?
Flood the banks with loads of easy money: helping to avert a credit crunch and providing these banks with so much capital that they can start buying the debt of troubled Eurozone countries. Interestingly enough, after the ECB’s first round of “unlimited three year loans” the bond yields of nearly all Sovereign European debt declined significantly, a sharp reversal in the trend.
So here’s what we have, the ECB is:
1. Increasing the money supply
2. Flooding the financial institutions with capital
3. Promoting increased lending and liquidity
The only part of the definition of QE that the ECB’s “unlimited three year loans” does not satisfy is the part where the ECB buys securities – however, by flooding the banks with so much capital the ECB is effectively buying up securities and bonds indirectly through the private banking institutions.
Simply put, you pump the banks full of capital and they’ll buy up those securities for you. It’s perfect, the ECB gets to have its cake (claiming its not doing QE) and eat it too (avert a credit crunch, stave off sovereign debt contagion, stimulate the economy).
These so-called “unlimited three year loans” are nothing more than a roundabout way of doing exactly what the US Federal Reserve did: Quantitative Easing.
And just for a quick comparison on how large of a QE the ECB is doing, let’s compare the numbers to that of the US Federal Reserve’s QE1 and QE2:
If about 1 trillion euros are loaned out by the ECB this time around, that would increase the ECB’s balance sheet by a total of about 1.5 trillion euros, or almost $2 trillion USD. The Federal Reserve, during QE1 and QE2, increased their balance sheet by about $2 trillion USD.
So depending on the amount loaned out by the ECB during the second round of unlimited three year loans, the amount of QE is about on par with the QE done by the Fed.
Why is this not getting more attention? Is it because the ECB continually denies that it will do QE? We all know how much QE1 and QE2 stimulated the stock market (the effects on the economy are debatable, but it did pump the markets up) and commodity prices – and the scope of easing the ECB is doing is comparable numerically to that done by the Fed, shouldn’t this be bigger news than it is?
The views expressed in this article are merely those of the writer.