Because the ECB cannot go bankrupt or run out of money. Word of Lagarde
The president of the ECB, Christine Lagarde, reiterated some elementary but uncomfortable truths and often blatantly denied by politicians and economists. The comment by Giuseppe Liturri
Unfortunately, Covid was needed to bring down, one after the other, all the dogmas on which the economic policy of the eurozone has been based in the last 20 years.
For some months now, the Commission, not to mention Mario Draghi , has also agreed that the answer to an economic crisis lies in the budgetary capacity of the States, supported by the issuance of public debt.
Yesterday it was the turn of the president of the ECB, Christine Lagarde, who reiterated some elementary but uncomfortable truths and often blatantly denied by politicians and economists who should also know something.
During a hearing before the European Parliament, he received two specific questions from the deputy Marco Zanni, leader of the Identity and Democracy group .
In detail:
- Although it is known that it is forbidden by the Treaties, a possible cancellation of the debt (therefore the public securities purchased with the QE and, ultimately, with the PEPP program) from the ECB budget, as proposed by the President of the European Parliament David Sassoli technically possible event or would it irreparably damage the operational capacity of the ECB which would go bankrupt?
Lagarde's response was telegraphic: it is prohibited by Article 123 of the TFEU and the ECB respects the Treaty, Point.
- What would happen to the ECB's balance sheet if there were losses on securities in the portfolio (question reiterated after Lagarde's first response).
Here Lagarde explained how the central bank works, which many ( Calenda and De Romanis , among others) have suddenly linked it to any bank that would go bankrupt in case of losses on its credits.
" The ECB will always be able to generate all the necessary liquidity and therefore, by definition, will never be able to go bankrupt or run out of money . " That's all.
The summary is that, technically, the ECB, like all central banks, is a particular institution that can generate all the money it wants, that can afford to suffer the cancellation of its assets and therefore to have a negative net worth without making its operation impossible. With a click, Lagarde generates bank reserves in its liabilities which become deposits with the ECB in the assets of the banks.
There is only one limit, the political one: that is, the rules we have given ourselves and which are not engraved in the tables of the Law. Rules written by men and erasable by men. There would be another risk: inflation. But that is now a goal regularly failed by the ECB for years, and therefore it is not a risk.
Indeed, if this continues, inflation will not come due to the excess of money in circulation but due to the destruction of the country's productive capacity, which will cause a problem of supply of goods.
So what do you do? Talking about debt cancellation, in the current regulatory framework, is tantamount to throwing the ball in the stands and creating, perhaps consciously, the usual stadium-like atmosphere that does not help the debate.
There is a narrow path, which is the one on which the ECB has been moving since 2015 and, even more so since March with the Pepp program: the ECB buys the bonds and systematically renews them at maturity, keeping them in perpetuity in the portfolio. Nobody cancels anything, but the effect is the same: that amount of securities is as if it did not exist and the related interest, collected by Bank of Italy as part of the Eurosystem, is transferred by Bank of Italy to the Treasury at the end of the year as dividends.
That's all.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/mondo/perche-la-bce-non-puo-andare-in-bancarotta-o-finire-il-denaro-parola-di-lagarde/ on Fri, 20 Nov 2020 06:00:12 +0000.