Deutsche Bank, the crumbling financial institution, does not like the European Central Bank (ECB) or Mario Draghi. In fact, the bank believes that the ECB and Draghi have gone over to the “dark side” because of quantitative easing, otherwise known as QE.
Ever since the ECB unleashed an aggressive trillion-dollar bond-buying program in addition to its subzero rates, Deutsche Bank officials have been warning that the ECB may send the eurozone into an economic collapse.
David Folkerts-Landau, chief economist of Deutsche Bank AG, released a report entitled “The Dark Sides of QE.” Ultimately, Deutsche Bank believes the ECB’s QE program is “backdoor socialisation” that hurts savers and inflates asset bubbles.
Here is an excerpt:
“While European central bankers commend themselves for the scale and originality of monetary policy since 2012, this self-praise appears increasingly unwarranted,” he writes. “ECB is stuck … between an unfavorable equilibrium of low growth, high unemployment and zero reform momentum on the one hand and growing risks to core country balance sheets on the other.”
The Deutsche Bank analysts fear that Draghi’s “whatever it takes” mantra may have dire consequences.
Here is the entire report:
The first is a paradox of ECB intervention: that monetary policy stifled the very reform momentum it sought to create. Up until July 2012, high interest rates and refinancing threats forced governments to be serious about reforms. Indeed, pre-2012, more than half the growth initiatives recommended by the OECD were being implemented across the eurozone. But last year just twenty per cent were. ECB intervention has curtailed the prospect of significant reforms in labour markets, legal systems, welfare systems, and tax systems across the continent.
Second, bond prices have lost their market-derived signalling function. Since investors began to anticipate sovereign purchases by the central bank in late 2014, intra-eurozone government bond spreads have been locked together. In turn, misrepresentative sovereign yields distort the whole fixed income universe that is priced off government debt.
Perhaps the darkest side of ECB monetary policy is the increasing concentration of risk on the eurosystem balance sheet – expected to be EUR 2tn by March 2018. In the event of a debt restructuring of a eurozone member, the liabilities of the national central bank are likely to be borne by the taxpayers of the other eurozone member states, even if losses are spread over a long period. Fundamentally, however, the debt will have been socialised.
Fourth, ECB intervention has not been a net positive for eurozone savers. While high and stable revaluation gains have buttressed total returns over recent years, this is clearly a one-time gain. Today, rising energy prices, the shortage of high coupons and ultimately mean-reversion are likely to take their toll.
Finally, the misallocation of capital caused by ECB policy is preventing creative destruction and causing asset bubbles. Increased lending has gone mostly to low quality existing borrowers while obviating troubled banks from the need to write down loans. Without creative destruction in ailing industries, investors in high-saving countries have simply bid-up the price of healthy assets.
Yep, this is a black eye for the ECB.
Photo by CDC via Flickr.
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