Does Cheap Debt Avoid Countries Going Bankrupt

It’s not a secret the cheap debt policy from the European Central Bank has really helped out several European countries to keep the government finances under control. Well, more or less, as several members of the Eurozone are still running huge budget deficits.

Source: European Commission

When the ECB was created, its main (and sole) mission was to keep an eye on the monetary policy in the Eurozone and to ensure price stability. The focus was on the inflation rate, which should be approximately 2% as that was thought to be ideal in the longer term. In order to keep the economy going and to boost the inflation rate, the ECB has started an asset purchase program just a few years ago. This would allow the Central Bank to pump more liquidity into the system.

Source: ECB.europa.eu

This plan was expected to have a ‘trickle down’ effect, but in reality most of the cash has been sticking to the wrong fingers. Banks and asset managers are benefiting, but the common man on the street doesn’t notice any benefit.

Au contraire, as the requirements for mortgages are becoming more strict, and you can just forget about easy access to credit cards or personal loans.

So let’s be clear, the low interest rate isn’t serving any other purpose than to make the institutions rich.

And we aren’t talking about a few billion and not even about a few hundred billion euro, as you can see on the next chart. The counter is at in excess of 1.6 trillion… and counting.

Source: Royal Bank of Canada

But perhaps more important, it also avoids the annual government budgets to fall off a cliff. In fact, even Jens Weidmann, one of the most fierce opponents of the buyback program, now expects the ECB to continue the purchase program.

‘Vorsorge ist notwendig’. Precautions are necessary.

That’s the verbatim quote of Weidmann in the previous edition of the Frankfurter Allgemeiner Sonntagszeitung.