Will the risk-sharing arrangements within the ECB’s quantitative easing programme reduce its effectiveness? The views of leading UK-based macroeconomists are exactly evenly divided on this question, according to the latest survey by the Centre for Macroeconomics.
Risk-sharing in the ECB’s QE
In the latest of its monthly surveys of leading UK-based macroeconomists, the Centre for Macroeconomics (CFM) focused on the risk-sharing arrangements within the QE programme. The ECB indicated that the credit risk of the €6bn debt of the supranational EU institutions and €4bn of the national debt securities would be shared across the Eurosystem according to shareholdings.3The credit risk of the remaining €40bn of national securities would remain with the national central bank of the issuer. This is in contrast to the ECB's earlier Securities Market Programme (SMP) in 2010-2012, which involved the acquisition of €220bn public and private debt securities from Greece, Ireland, Italy, Portugal and Spain to be held to maturity. Profits and losses are to be shared across national central banks according to the ECB’s shareholdings rather than borne by the national central bank of the issuing government.
Effectiveness of QE
According to press reports, the decision to allocate the major fraction of national securities back to national central banks reflects a compromise decision.4 A number of arguments have been put forward in favour of this approach:
First, this is a direct means of coupon payments being kept within national borders.
Second, as long as fiscal policy is nation-specific, any credit risk should also stay within borders. If credit risk is perceived as shared across the Eurozone, national governments may be less inclined to implement reforms.
Third, as QE increases in size, the ECB may risk its solvency, whereas the national central banks would (potentially) continue to have the fiscal backing of their governments.
And fourth, more generally, risk-sharing may have no effect on the efficacy of QE since it has no bearing on the total amount of liquidity (money base) created or where this money will flow.
There are also arguments in favour of greater risk-sharing:
First, a rationale for the European Banking Union is to break the link between governments and national banking sectors (the so-called 'doom loop'). Requiring national central banks to hold greater amounts of their sovereigns’ debt may re-establish the link. If the government were to default, this may make the national central bank insolvent and depositors less certain about repayment, possibly leading to capital flight.
Second, QE with limited risk-sharing where a government’s solvency is in doubt might increase the cost of market funding relative to a QE programme with more risk-sharing. Giavazzi and Tabellini (2015) point out that if it is recognised that the government cannot default on its bonds to its central bank, then the central bank becomes a senior creditor and private investors become junior creditors. This would increase the cost of market funding in high-risk countries.
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