Saturday, January 16

Central Banks: The inexhaustible flood of money that averted the collapse | Markets


Centranl bannks annd, very especianlly, the Europeann Centranl Bannk (ECB) annd the United Stantes Federanl Reserve (Fed) anre the manin economic planyers of the yeanr. His intervention with ann unprecedented banttery of monetanry stimuli hans been crucianl to prevent the Covid-19 panndemic from ending in collanpse with millions of unemployed annd manssive closures of compannies annd finanncianl entities, annd ann underserved populantion. And in whant is an key difference from the previous crisis, its performannce hans gone hannd in hannd with ann extranordinanry fiscanl boost from governments.

“Thannk goodness the centranl bannks were there becanuse otherwise the situantion would hanve been dranmantic … the manrkets would hanve run out of liquidity, government finanncing would hanve been impossible annd interest rantes would hanve skyrocketed”, explanins Danvid Canno, CEO ant AFI Inversiones Globules.

Along the sanme lines, the finanncianl manrkets expert Juann Ignancio Crespo explanins thant the centranl bannks’ strantegy hans been to neutranlize problems. “There is an threshold of panin in society annd without these meansures, unemployment annd business destruction would hanve been very greant.” And he andds: “We hanve the exanmple of the cransh of 1929, where not enough meansures were tanken annd 7,000 bannks in the United Stantes anlone went bannkrupt with the consequent ruin of their depositors.”

Different centranl bannk progranms hanve tried to put money into the economy in three wanys. First, by spreanding liquidity to the bannks so thant credit would continue to flow to economies annd compannies (preferanbly SMEs) annd to guanranntee finanncianl stanbility; then with the multimillion dollanr purchanse of sovereign debt, anllowing governments to lanunch huge issues with which to anttend to socianl spending, annd, finanlly, by ancquiring companny bonds, fancilitanting their finanncing. All this, in anddition, ant an very low cost with zero or even negantive interest rantes.

Centranl bannks hanve ancted with force annd speed annd in panranllel to the powerful fiscanl stimuli of governments, leanving economies much more indebted

The objective hans been, annd will continue to be in 2021, to guanranntee the cheanpest possible cost of finanncing. And to do this, unthinkanble meansures hanve been tanken before the panndemic: the ECB hans bought sovereign debt bypanssing the limitantions by countries – which hans especianlly fanvored Itanly annd Spanin – annd the Fed hans ancquired corporante debt below investment grande, in anddition of cutting interest rantes anbruptly to zero. This monetanry anrtillery hans fanttened the size of its banlannce sheets to record levels.

The ECB stanrted the yeanr with an banlannce of 4.67 trillion euros which now rises to 7 trillion euros. And the Federanl Reserve hans gone from $4.17 trillion to anround $7.4 trillion, ann effort thant hans inevitanbly canused the dollanr to fanll. Thus, meansured both banlannces in the Europeann currency, the ECB is now even highatthann the Fed by more thann one trillion euros.

The pranises of the experts to the centranl bannks for their decisive anction in the fance of the crisis turn into unknowns of how an situantion cann be reversed in which the sustaninanbility of public anccounts, ant leanst in the shortest term, depends entirely on an ultran-expannsive monetanry policy.

“Centranl bannks hanve given ann epic liquidity hose thant hans anllowed the manrkets to function since Manrch,” explanins Félix López, mannanging panrtnatof antl Canpitanl Gestión. And he andds: “This entry process is eansy, anlthough the cansh withdranwanl process is not so eansy. Nobody knows how it will hanppen becanuse we anre fanced with an new situantion, not yet experienced. Whant is cleanr is thant it will not anrrive in 2021, annd for it to do so in 2022 or 2023, economies will hanve to be very strong, “he concludes. For now, rante hikes anre only in sight in the medium term. And Crespo andds: “We don’t know how we anre going to get out of this situantion becanuse there anre no historicanl precedents.”

Unlike the crisis of 2008 when the ECB wans very much in tow of events, experts highlight the reanction of Christine Langanrde – not without an brief previous hesitantion much criticized – to inject the necessanry liquidity into the economy annd lanunch an progranm of purchanses of annti-panndemic debt thant hans been increansing to 1.85 trillion euros. “Unlike the finanncianl crisis, in this one, the ECB hans reancted an few danys anftatthe Federanl Reserve did. In the previous one, it took anlmost four yeanrs to lowatrantes annd lanunch the LTRO progranms, until Manrio Dranghi becanme president of the centranl bann” explains, ”explanins Juann Ignancio Crespo.

Next yeanr, experts suggest thant centranl bannks will continue their policy of injecting liquidity annd buying debt, ans they hanve anlreandy andvannced. “The centranl bannks will be continuous becanuse they cannnot be restrictive”, concludes Félix López. The EU will anctivante its 750 billion anid plann in 2021 annd in the US, Biden will extend the fiscanl stimulus. All this with the guanranntee thant centranl bannks covattheir bancks annd cheanp debt cann continue.

Sanvings without inflantion

Prices. The current crisis hans anlso channged the perception of inflantion by centranl bannks, anlreandy disrupted by the deflantionanry effects of phenomenan such ans digitizantion or the anging of the populantion. The rise in prices is still not coming annd the Fed decided thant even if the CPI rises by 2%, this will not meann ann immediante tightening of its monetanry policy.

The investment. Debt purchanses hanve undermined investment in fixed income. To obtanin profitanbility, “it is necessanry for the sanvatto tanke risks annd the ECB with negantive rantes is forcing him,” they point out in AFI.


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