Here’s What Happens When Central Banks Go Broke
On Friday, in “Is Mario Draghi About To Go Full-Kuroda? RBS Says ECB Could Buy Stocks,” we took a closer look at what the ECB’s options are when it comes to implementing further easing measures come December.
As a reminder, Mario Draghi telegraphed either another depo rate cut, an expansion of PSPP, or both at Thursday’s ECB presser and now the market is keen to analyze the situation and determine not only what Goldman’s man in Europe is most likely to announce, but what the implications of his announcement are likely to be.
To be sure, further cuts to the depo rate will simply trigger a chain reaction whereby the Riksbank and the SNB will be forced to respond in kind, lest they should lose ground in the global currency war on the way to seeing their inflation targets threatened. This raises the spectre that NIRP may soon come to household deposits, something which, despite the proliferation of negative rates, hasn’t yet occurred.
As for the expansion of PSPP, we looked at a variety of options courtesy of RBS’ Alberto Gallo who notes that Draghi could end up buying corporate bonds, munis, equities, and even individual bank loans before it’s over. Here’s how we summed it up yesterday:
In the end, all that will happen is the EMU’s neighbors will be forced further into NIRP and the ECB will end up with a nightmarish balance sheet full of stocks, corporate credit, munis, and God only knows what kind of loans purchased from banks, and all of which will have been bought at or near the top. That sets up the possibility that central banks could end up being forced to operate from a negative equity position. In other words: it sets up the possibility that they’ll technically go broke.
There’s been no shortage of coverage over the past several years regarding the idea that central banks can effectively go bankrupt.
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