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A blog by Leon Oudejans

FT Breaking News Alert on ECB government bond purchases

21 January 2015


Today I received the following FT Breaking News Alert:

“The European Central Bank is mulling buying around €50bn-worth of government bonds a month for between one and two years as part of its quantitative easing programme set to be unveiled on Thursday. The central bank is yet to formally table the proposal to the 25-member governing council, but has discussed the idea of a target monthly amount in phone calls with policy makers, according to two people familiar with the matter. The council will meet for dinner late on Wednesday before voting on QE on Thursday. More opposition has emerged to the ECB’s idea of asking the 19 national central banks of the eurozone to shoulder the risk for purchases of their government bonds. A decision on whether or not policy makers break with the tradition set by earlier bond-buying schemes and scrap commitments to sharing risks between central banks is expected to go down to the wire, with several national central bank governors set to voice objections.”

This may look like gibberish to many but it would feel entirely different when it would read like: ECB intends to raise Dutch taxes. Or German taxes. Or any other EU member’s taxes.

How is that even possible? Well the ECB is still not satisfied with the lack of impact of earlier ECB interest decreases and now intends to buy government bonds of 50 billion Euro per month. Euro 50,000,000,000 x 12 = Euro 600 billion per year. A 2 year program would imply 1.2 trillion or Euro 1,200,000,000,000. A loss of only 1% on these purchases would imply a loss of 12 billion Euro.

Purchasing governments bonds will indeed drive interest further down but will also drive bond prices up. Given the very low interest levels that we already have, future ECB government bond sale prices will – no doubt – be lower than the ECB purchase prices. A loss of just 1% is nothing in such a case. The ECB losses will either cut its dividend to shareholding countries or cause a need for new share capital due to losses incurred. I fear the magnitude of such losses. Each share capital increase will cause an increase of taxes in shareholding countries. Guess who are the big shareholders?? Indeed.

Yesterday I heard the Dutch Secretary of Treasury saying in the 8PM news that he is aware of the complaints of Dutch parliament on this issue but that he cannot do anything. Seriously??? Resign !

There are several angles from which I object to this plan:

– monetary: the correlation between low interest and increased economic activity is thin;

– economy: rigid regulations, inflexible labour markets, and lack of competition will remain the same;

– democracy: it is absurd that an “independent” EU organisation can start such a program without the explicit consent of EU members who will need to pay for the expected massive losses;

– ECB mandate: this program is far beyond the ECB’s objective of maintaining “price stability”.

I am genuinely pissed.


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