ECB and Fitch have their Deja-What? moment
The ECB should buy more member debt? Really? I don’t understand the reverence for the rating agencies. I don’t even know what Fitch thinks is its mandate. But whatever it is I don’t see how today’s Fitchism makes any sense or helps to restore the shine to the reputation of credit rating agencies. If Fitch thinks it is carrying the ball for them, Oops! It just stepped out of bounds.
The ECB is a central bank that has been built on the model of the old Bundesbank. Fitch is aware that the Germans do not want the balance sheet expanded, risking the viability of the currency and the integrity of the central bank.
So why has Fitch steeped into the Euro-spat to holler for the ECB to do more?
Certainly someone in Europe needs to do more. But what not scream at the Germans or at the French or at EcoFin for not making some better arrangement? Or the member countries themselves for not using the IMF? Granted the ECB is a financial institution that could snap its fingers and do this bidding. But as Freddie Prince used to opine, ‘hey, man it’s not my job.’ And it isn’t. Not one thinks that some ECB bond buying is going to stoke inflation now but that is not the issue.
The whole opposition by the Germans to this balance sheet expansion and the opposition by those here in the US and within the Fed (and outside) to blowing up a balance sheet now, and to erode the credit quality of its holdings, is to avoid engaging central banking in fiscal policy. This action gets the politicians off the hook to do something and later embroils the central in the criticism of political meddling. Central banks should only jump into this breech when there is a clear and present danger and systemic risk.
Indeed, in the case of the ECB, it is prohibited by its charter from doing exactly what Fitch asks of it ( Duh!?). The ECB’s current buying of so much sovereign debt rests on a very thin, very tenuous assumption that the very different yields in different government bond markets reflects a distortion in the monetary transmission mechanism. RIGHT. Actually nothing could be farther from the truth. It is evidence that markets are in fact working, Investors are discriminating. What it represents is the perception and existence of greater credit risk in some government markets compared to others. So why should the ECBC go there if other sovereign governments or the IMF will not make loans and if countries will not adopt stringent enough austerity programs?
Why is Fitch urging the ECB to do something now for which it may later castigate the ECB and ratchet down its credit rating later?
It beats the heck out me, how about you?.