German Unease

Draghi's Collision Course

Mario-Draghi-Oct-2-2014-Source-AP-Lapresse-Naples-ECB-meeting
Best foot forward. ECB President Mario Draghi pushes forward with his asset-backed securities buying plan despite nay-sayers.
  • Why it matters

    Why it matters

    The ECB is fighting to keep the euro zone’s economy afloat. Critics fear taxpayers could pay the price if the ECB’s new plans to buy up risky assets fail.

  • Facts

    Facts

    • The European Central Bank’s new program to buy asset-backed securities begins in mid-October.
    • ECB President Draghi has said he plans to add as much as €1 trillion to the ECB’s balance sheet.
    • Annual inflation in the euro zone has fallen to 0.3 percent, well below the ECB’s stated target of close to 2 percent.
  • Audio

    Audio

  • Pdf

Hans-Werner Sinn, president of the Ifo Institute for Economic Research, one of Germany’s most prominent and combative economists, has long warned the ECB is taking unnecessary risks that Germany’s taxpayers will end up having to pay for. Now he has been joined by a chorus of prominent German policymakers critical of the ECB’s latest plan to buy up asset-backed securities – pooled loans that are packaged for investors – from banks.

ECB President Mario Draghi argued that reviving the ABS market is needed to boost lending to small businesses in Europe, but critics said stepping into a market that was partly blamed for the 2008 financial crisis is too risky.

Mr. Draghi said the ambitious plan is necessary to avoid the euro zone from falling into a deflationary spiral that could further harm an already-stagnating economy. He plans to add as much as €1 trillion ($1.26 trillion) to the ECB’s balance sheet, essentially injecting fresh money into European banks in the hopes they will boost lending.

In this exclusive Handelsblatt interview, Mr. Sinn explains why he remains unconvinced.

Handelsblatt: Mr. Sinn, the European Central Bank (ECB) will begin buying asset-backed securities in the middle of this month. What do you think about the idea?

Mr. Sinn: I don’t think anything of it. Why should the central bank add the banks’ risks to its balance sheet, risks for which taxpayers are ultimately liable? It’s an illusion to believe that the burdens of write-offs will simply disappear through the ECB’s purchase of these securities. The ECB has pursued a bailout policy since 2009. It rescues debt-ridden banks and governments, as well as their international creditors. The ABS purchases are just another step.

Hans-Werner-Sinn-Ifo-2012-Source-DPA-Unhappy
Economist Hans-Werner Sinn is having a hard time believing Mr. Draghi. Source: DPA

 

But doesn’t Mr. Draghi only want to buy top-quality securities?

What else can he say? But it’ll be the same story as it was with the securities that the ECB is accepting in exchange for its loans to the banks. First it was only top quality, but then the standards were lowered, bit by bit. Now it’s also accepting junk securities.

The ECB is demanding government guarantees in the event it sees itself forced to buy lower-quality securities.

That doesn’t surprise me. After all, it can’t be in the ECB’s interest to become Europe’s biggest bad bank. We’re talking about hundreds of billions of euros here. From the taxpayer’s perspective, it ultimately doesn’t matter whether a government is issuing guarantees. Even if the ECB incurs the write-off losses, taxpayers are still footing the bill.

How do you think the banks will handle the ECB offer?

The banks will try to nicely package their problematic securitized loans and sell them to the ECB. For them, it’s a way to bounce back into healthy territory.

Will they start lending more?

They’ll get rid of the problematic old securitized debt first, which is still cluttering their balance sheets. I doubt they will start lending in a big way to high-risk borrowers, because the banks are already awash in liquidity today.

Inflation is currently at 0.3 percent in Europe and has been declining for months. Should the central bank do nothing about this?

I think the deflation argument is a pretext, especially as a deflationary development in southern Europe is a condition for increasing competitiveness. The average core inflation rate is 0.9 percent. The rest is made up of one-time effects, such as falling energy prices. The ECB has stealthily transformed a barely acceptable upper limit of just under 2 percent into a goal. However, the Maastricht Treaty calls for price stability and not 2 percent inflation.

 

Mr. Münchrath is an editor at Handelsblatt, responsible for leading the newspaper’s economics and monetary policy reporting team. Christopher Cermak, an economics and monteray policy editor at Handelsblatt Global Edition, contributed to this article. Contact: muenchrath@handelsblatt.com and cermak@handelsblatt.com 

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