Y ESTERDAY’S data was the hardest evidence yet that since taking the helm, ECB president Mario Draghi has endorsed a policy of quantitative easing “by the backdoor”.
The idea is to flood banks with cheap money and hope they – or “encourage” them to – use it to buy up sovereign debt.
To make it work, the ECB has had to loosen its collateral requirements, allowing banks to swap lower-quality assets than it would normally accept for cheap cash.
In the process, the ECB becomes a convenient dumping ground for what Pimco has termed “hot potato” (i.e. unsellable) assets and junk sovereign bonds, keeping zombie banks afloat. The hope is to avert a catastrophic credit crunch before it feeds through into recession.
On that score, it is probably too late – Europe’s economy is likely already shrinking again, by most economists’ reckoning, and banks are more liable to sit on the cash than lend it on to businesses.
So the immediate, more modest aim is instead to avoid the collapse of the banking system and sovereign debt market while politicians fiddle.
But even the cheap cash might not be enough. Political expediency could feed through to regulatory “tweaks”.
For example, it could involve, in the words of one economist, “telling the European Banking Authority to get lost”. More precisely, write-downs on sovereign bonds for the purposes of stress-testing could be put off.
More long-term, it could also foil efforts to loosen Basel III liquidity rules so banks can fulfill them using assets other than sovereign bonds.
If that happens, however, it will mean no end to the sovereign-bank feedback loop.