ESRB: Regulatory Treatment of Sovereign Exposures

Interesting that the ECB is now getting worried about the sovereign gilts just as they are starting a quantitative easing to buy “risky” government bonds of the government and replace it with hard printed euro cash on the banks balance sheet. Are they trying to talk the yields down? They will say the banks are then supposed to go out and find good and worthy low risk investments in European SMEs, individuals and industry in order to bestow the newly minted cash. But of course the banks will put into the London property bubble, because there they get healthy returns, commissions and bonuses for executives. They are not going to pick a fish farm in Dingle or wind farm in Wicklow as the recent fall in commodity prices is now making a lot of sensible investments risky.

Of course they could expand the QE to 200 trillion and buy up the sovereign debt in the Euro area and remove “all risk” but without doubt that would lead to hyperinflation?

Another more sensible option would be to tell the banks that they want some targets say in SME loans on the first tranche of QE funds or else they get no more QE and have to hold on to their “risky” sovereign bonds. But you know what sovereigns never tell the banks what to do, even if they own them, and this if it worked would blow away any neo-liberal market junkies forever and we would never have to listen to their nonsense again.

A Chatham House paper – linked by Newsweek – which makes the issues somewhat more understandable to those not versed in the role of central banks in the arcane functioning of financial markets, at least in my own case.

http://www.newsweek.com/will-quantitative-easing-work-europe-302405