Bank’s Love of Debt Threatens ECB’s Plans

When Europe’s leaders set out in June 2012 to break the “vicious circle” between banks and sovereigns, they left rules for treating government bonds untouched, an oversight that may subvert their drive to prevent a recurrence of the debt crisis.

Under EU rules, banks can rate all debt issued by the bloc’s 28 national governments as risk-free, avoiding any increase in their capital requirements. This encourages so-called carry trades, whereby lenders borrow at low cost from the European Central Bank and plow the money into state debt that offers higher returns.

Twenty months after leaders pledged to change this behavior, banks hold more sovereign paper than ever. ECB President Mario Draghi said in December that when the Frankfurt-based central bank offered about 500 billion euros ($680 billion) of new low-cost liquidity two years ago, lenders used it “mostly to buy government bonds,” rather than for lending to stimulate the economy.

Bloomberg

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.