ECB holdings of government debt are now very close to Japanese levels
Governments around the world have borrowed their way through the Covid crisis. Increasingly, they’ve relied on their own central banks — like the US Federal Reserve or the Bank of England — to buy-up government bonds.
But where do the central banks get the money they need to do this? The answer, of course, is from nowhere. It is created out of nothing through the magic of quantitative easing or QE. Because nothing is an inexhaustible resource, central banks have been able to print trillions of dollars of “free” money, which has been used to purchase bonds.
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As a result central banks own an ever-greater share of their own governments’ debt. An extraordinary chart from Robin Brooks shows just how dramatic the surge has been:
Japanification of the Euro zone
1. Japan has high debt-to-GDP & low yields
2. Foreign investors have little appetite for JGBs
3. ECB holdings of gov't debt are up to BoJ levels
4. Foreign holdings of Euro zone debt are down
5. You can have low yields or foreign buyers
6. Not both pic.twitter.com/7IMUF9PsW5
— Robin Brooks (@RobinBrooksIIF) December 8, 2021
The Bank of Japan — a pioneer of QE — led the way. But as you can see the European Central Bank has been catching-up fast.
It started around the time of the Eurozone crisis, when the money markets lost confidence in vulnerable member states like Greece. By turning on the printing presses, the ECB made itself a major buyer of debt issued by member states. As a result, there wasn’t (and still isn’t) as much need to rely on the markets. The move also sent a signal that the Eurozone authorities really would do “whatever it takes” to prevent a second crisis.
After Covid hit Europe, the ECB responded with a further surge of QE. As a result, central bank holdings of government debt are now very close to Japanese levels.
What about Britain? According to the latest quarterly report from the UK Debt Management Office, the Bank of England now owns a third of UK government debt, which is not that dissimilar from the Eurozone. However, while HMG is in debt to a central bank under its ultimate control, the Eurozone countries are in debt to a central bank largely controlled by foreigners — and especially the Germans.
As the largest Eurozone economy, with some of the lowest debt levels, Germany wields increasing influence over its neighbours’ economic policies. Unluckily for fans of unrestricted public largesse, the new German finance minister is Christian Lindner, a dry-as-dust fiscal conservative. The fact that he’s just praised the “very impressive reform measures” (forced upon the Greek government in the wake of the Eurozone crisis), is a warning of what may be to come.