From Project Syndicate:
MUNICH – While the
world worries about Donald Trump, Brexit, and the flow of refugees from
Syria and other war-torn countries, the European Central Bank continues
to work persistently and below the public radar on its
debt-restructuring plan – also known as quantitative easing (QE) – to
ease the burden on over-indebted eurozone countries.
Under
the ECB’s QE program, which started in March 2015 (and will likely be
extended beyond its scheduled end in March 2017), eurozone members’
central banks buy private market securities for €1.74 trillion ($1.84
trillion), with more than €1.4 trillion to be used to purchase their own
countries’ government debt.
The QE
program seems to be symmetrical, because each central bank repurchases
its own government debt in proportion to the size of the country. But it
does not have a symmetrical effect, because government debt from
southern European countries, where the debt binges and current-account
deficits of the past occurred, are mostly repurchased abroad.
For
example, the Banco de España repurchases Spanish government bonds from
all over the world, thereby deleveraging the country vis-à-vis private
creditors. To this end, it asks other eurozone members’ central banks,
particularly the German Bundesbank and, in some cases, the Dutch central
bank, to credit the payment orders to the German and Dutch bond
sellers. Frequently, if the sellers of Spanish government bonds are
outside the eurozone, it will ask the ECB to credit the payment orders.
In
the latter case, this often results in triangular transactions, with
the sellers transferring the money to Germany or the Netherlands to
invest it in fixed-interest securities, companies, or company shares.
Thus, the German Bundesbank and the Dutch central bank must credit not
only the direct payment orders from Spain, but also the indirect orders
resulting from the Banca de España’s repurchases in third countries.
The
payment order credits granted by the Bundesbank and the Dutch central
bank are recorded as Target claims against the euro system. At the end
of September, these claims amounted to €819.4 billion, with the
Bundesbank accounting for €715.7 billion, which was 46% of Germany’s net
external assets at midyear. Since the beginning of the year, both
countries’ combined claims have increased by €180.4 billion, or €20
billion per month, on average. Conversely, the Target debt of the
Southern European countries – Greece, Italy, Portugal, and Spain (GIPS) –
amounted to €816.5 billion.
For
the GIPS countries, these transactions are a splendid deal. They can
exchange interest-bearing government debt with fixed maturities held by
private investors for the (currently) non-interest-bearing and
never-payable Target book debt of their central banks – institutions
that the Maastricht Treaty defines as limited liability companies,
because member states do not have to recapitalize them when they are
over-indebted....
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