Thursday, December 1, 2011

Has the ECB Started De Facto Quantitative Easing?

On Tuesday, the European Central Bank (ECB) failed to sell as many European bonds as they sold. This is known as "sterilize" it's bond purchases. See the article here:
Nov. 29 (Bloomberg) -- The European Central Bank failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months, a sign of mounting tensions among euro-area banks.

The Frankfurt-based ECB said today that 85 banks bid a total of 194.2 billion euros ($259 billion) for seven-day term deposits. It had aimed to drain 203.5 billion euros, the amount its bond purchases have created since the program began in May last year. It last fell short of its intended total on April 26.
Although this is just one data point, it is interesting because these types of purchases are exactly the same as the quantitative easing program the United States implemented.

Quantitative easing is essentially "money printing". It is controversial strategy favoured by many economists, including Paul Krugman.

However, Germany is dead set against it. Is this the start of a back-door quantative easing program for Europe? At this point it is unclear. However, I feel that eventually Germany and the rest of Europe will have no choice but to print money. I don't see any option being politically realistic.

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