Governments in a pandemic need money, and central banks are eager to buy their bonds with printed money. Finally, all residents have elevated inflation, a form of hidden tax. This, in a nutshell, is what the new order of public finances in Europe looks like. Poland has adapted to this order almost perfectly.
- The NBP copies the moves of the European Central Bank and has already collected 10 percent for reprinted money. public debt
- The ECB intends to continue printing and wants inflation in the euro zone to rise to around 2%. annually
- The economist of the Polish Business Roundtable points out that the actions of the ECB cause a dangerous distortion of the bond market
- Still on the brink, Greece may now continue to borrow with lower interest rates than Poland, the US and the UK
- If the NBP continues to repeat the steps taken by the ECB, we cannot count on a slowdown in inflation
- More such information can be found on the Onet.pl home page
– 42 percent all government bonds of euro area countries are already on the balance sheet of the European Central Bank. The boundaries of common sense are capacious, but so? – the chief economist of the Polish Business Roundtable on Linkedin warns.
As he explains to Business Insider, it is about bonds issued by states since the ECB started another program to save the economy from another crisis, i.e. the Pandemic Emergency Purchasing Program (PEPP).
And all this is happening at a time when the expected rebound in the euro area after the pandemic, i.e. after a decline of 6.5%. in 2020 it is expected to amount to 4.8 percent this year, and next year – 4.5 percent. When faced with such expectations, it is hard to speak of an extraordinary response to a real crisis.
Moreover, on Thursday, July 22, the ECB announced that it will not stop reprinting and maintaining negative interest ratesto “lead the euro area economy out of a sustained slow inflation pattern,” announced ECB members. The bank intends to tolerate even a moderate and temporary breach of the inflation target.
“The new guidelines appeared two weeks after the ECB announced a new strategy in which the inflation target was raised to 2%.” – points to the daily “The Financial Times”. The article commenting on the new ECB decisions indicated that the large central banks of Canada and Australia have recently decided to slow down economic stimulus and the US Federal Reserve is debating when the reprinting program will end. The ECB is therefore going against global trends.
NBP has already bought 10 percent. public debt
Poland does the same as the ECB. From the beginning of the asset purchase program (the so-called outright buy program), the NBP purchased bonds with a total value of PLN 140 billion, of which PLN 80 billion of government bonds and PLN 60 billion of bonds guaranteed by the State Treasury (BGK for PLN 40 billion and PFR for PLN 20 billion PLN) – this is the situation after the last tender on July 16. In this way, the state has money to finance anti-crisis shields, and the NBP provides it with the money printed on it.
The NBP president argued that this money would return to the bank when the government buys bonds. The question is for what the government will buy these bonds for? It will have to issue more bonds. Who will he sell them to and at what price? The buyers will probably have to be the NBP again, perhaps under different management then.
PLN 140.2bn spent by the central bank on government bonds is the equivalent of approx 10 percent debt of the entire public finance sector (general government debt – including institutions such as BGK and PFR), which reached PLN 1.39 trillion at the end of March 2021.
For comparison, the European Central Bank has so far bought government bonds worth 38.5 percent. of the total debts of the euro area countries, i.e. EUR 4.3 trillion of the total government debt of 11.1 trillion.
What the NBP acquired during the pandemic, is the equivalent of 41 percent. government debt issued at that time, i.e. counting from the end of 2019 to March 2021. As can be seen, the scale is similar to that of the ECB (42% of debt issuance purchased in a pandemic). In other words, central banks finance indebted governments and monopolize the bond market by artificially lowering their interest rates.
Will the reprint stay forever?
At the end of last year, the European Central Bank has already purchased bonds, mainly government bonds of the euro area countries for 4.3 bln euros, of which EUR 1.4 trillion has been spent since the beginning of 2020. – provides the bank in statistical statements. In total, a gigantic amount of EUR 1.85 trillion is to go to the purchase of bonds for printed money under the PEPP. In just one week, between 9 and 16 July, EUR 24 billion worth of securities, purchased for monetary policy purposes, were added to the assets of the ECB.
– There is an unresolved problem which boils down to how to withdraw from the program later? The sale of such masses of bonds on the market will shake the market. There will be no turning back from this. If debts are rolled up, they will remain in the bank’s balance sheet until the end of the world – says Janusz Jankowiak in an interview with Business Insider.
As a result, euro produced by the bank, which has no economic backing, is likely to remain in the market. And that’s a straightforward path to high inflation. Besides, the ECB is not hiding its plans to increase it. The question is whether it will be able to stop it when it exceeds the assumed thresholds.
Greece can borrow cheaply again
– This is indirect financing of sovereign debt by the central bank. On the one hand, there is stabilization and low debt rates, but on the other hand, it means in the market there is a minimum number of securities in free circulation, and most of it is financed by the bank. This is not a procedure that is standard and one that reflects real bond prices that take into account domestic risk, the economist points out.
– At the very beginning of the program, Christine Lagarde (ECB President – ed.) Said that the goal is not to narrow the spreads (interest rate differences – ed.) Of the issue between countries. However, this is true, it does. The risk of emissions for individual countries should be different and assessed by the market, but the ECB is causing it to equalize. The non-market nature of this situation causes debt to lose its basis for risk valuation, which is the essence of the bond market – summarizes the expert.
Effect? Ten-year interest rate Greek bonds recently fell to 0.67 percent.while at the end of 2019 Greece had to pay interest of 1.45 percent. And the situation of Greece, still on the brink of bankruptcy, has worsened during this time, not better. The debt of Spain, which is also mired in economic and budgetary problems, has an interest rate of only 0.33%, and the slightly better situation of Portugal – 0.24%.
For comparison, the government must now give about 1.6 percent for Polish 10-year bonds. interest, the US government – 1.3 percent, and the United Kingdom – 0.6 percent. These are countries that have a much better condition of public finances than Greece, Spain or Portugal.
The ECB is flooded with empty money
The assets of the European Central Bank were on July 16 already 8 trillion euros. The GDP of the euro area countries in the four quarters ending in March amounted to EUR 11.4 trillion, so the assets of the ECB are already around 70%. GDP.
For comparison, the Fed has assets at 33.9 percent. US GDP, Bank of England – 38.7 percent UK GDP, Bank of Japan – 130.8 percent Japan’s GDP and the People’s Bank of China 33.9 percent. China’s GDP. As you can see, the euro zone is following the path of Japan. This has been stagnant for years.
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And Poland? NBP assets at the end of March in the amount of PLN 771 billion accounted for 32.8 percent. GDP for 12 months (PLN 2,350 million from Q2 2020 to Q1 2021). However, from the beginning of the pandemic, i.e. between March 2020 and May 2021, the bank’s assets increased by PLN 236 billion, i.e. by as much as 44.8 percent
Hello high inflation
Such a mass of empty money at the time of the crisis did not yet affect inflation, because in a crisis there are natural tendencies towards decreases and not increases in prices. But there is an economic recovery right now, so inflation “raises its head”.
In the euro zone, a year ago in June, the average price increase was 0.3%. y / y, and in June 2021 it is already 1.9 percent. YoY and according to the EC’s forecasts, such growth is expected to take place throughout 2021. This is almost the declared new target of the ECB (2% annually).
For comparison, inflation in Poland is measured according to EU standards (HICP) was 4.1 percent in June. Every year, in April, reaching even 20-year highs and exceeding the level of 5 percent. The European Commission predicts that we will end the year with a price increase of 4.2 percent.
Too high inflation is dangerous for the economy, as it triggers a spiral of actions – to change wage increases and prices of products and services – which does not serve it at all, and certainly does not help the wealth of the inhabitants. Turks have been testing it recently in Europe. The result is the devaluation of the lira and … cheap holidays for Poles.
In the European Union, we are only ahead of the rise in prices Hungarians, but they have already raised ratesto bring prices down. The NBP is still waiting for the next data and according to the declaration of the president Adam Glapiński, the MPC will probably make a decision not earlier than November.
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