The European Public Debt Refinancing Program - Why the ECB Quantitative Easing Should Envisage Euro-Zone Government Bonds

The credit risk exposure of the German banking system is growing again after the 2009 peak and its subsequent reduction. This column comments it through the lens of the Target2 net balances in connection with the capital flows experienced by the Eurozone (EZ) balance of payments. Several aspects arise. LTRO program launched at the end of 2011 served to deleverage the EZ banks. This happened by mutualizing the German banks' credit risk on the Eurosystem and by transferring on the EZ peripheral countries the risks of their national public debts. Moreover the German massive lending activities are part of a more general vendor financing scheme that in a first phase was structured substantially within the EZ while now is moving outside European borders. These dynamics have been considered by the ECB in the recent (September 4) unconventional monetary policy measures. The forthcoming Quantitative Easing (QE) will envisage purchases by the Central Bank of Asset Backed Securities (ABS) “simple and transparent” of high and medium-high quality but only insofar as the ABS will not have as an underlying assets credit granted outside Europe. This measure would hence exclude the possibility for the German banking system of mutualising on the Eurosystem the credit risk arising from the new world-wide vendor financing scheme. The QE would also provide for the purchase of Covered bonds by the ECB. Anyway, given the characteristics of medium-high standing provided by the QE, it is likely that a significant portion of the assets affected by this purchase program will come from German banks. It remains thus the issue that also this new monetary policy measure will only include private debts. On these bases can be glimpsed the risk that once again ECB interventions could bolster the mutualisation of German banks' credit risk (except for the portion originated extra-EU) on the Eurosystem instead of moving once for all towards the mutualisation of EZ countries public debts. Finally under this perspective it is illustrated an original proposal in order to improve the Euro architecture, restore the uniqueness of the Euro interest rate term structure, exit from the crisis and undertake a path of sustainable growth for all the member countries: the European Public Debt Refinancing Program