ECB's money printing may stymie cash generators

Wed Mar 18, 2015 2:53am EDT
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By Mike Dolan

LONDON (Reuters) - The European Central Bank may well be printing money via its landmark government bond buying program, but it could also be destroying some of the financial system's own printing presses in the process.

Little over a week after the ECB launched its 1 trillion euro 'quantitative easing' campaign, financial markets are fretting that there is a shortage of bonds for the central bank to buy.

This has created a hiatus in the plumbing of the global financial system that's seen bond yields and long-term interest rates vanish across the spectrum and move deeply negative in some cases, especially benchmark German bunds.

ECB officials insist this 'scarcity', rather than shortage, is a deliberate part of QE and forces down yields on the lowest risk bonds in order to push banks and investors into riskier lending more useful to the economy.

But the stimulus to cash flows around financial markets rather through the high streets has been far more seismic.

"ECB QE will not have a significant effect, at least in our view, on the real economy - but it is having a massive effect on financial markets," said Phil Poole, head of Research at Deutsche Asset & Wealth Management.

"There is clearly a distortion in the market which is leading investors generally to take more risk or buy less liquid assets in order to generate a return."

Some experts beg to differ with the ECB and say a growing shortage of top-rated bonds, particularly AAA-rated German bunds, is playing havoc with the way the financial system generates money within itself by the pledging and re-pledging of top quality bonds as collateral in return for cash.   Continued...

German police officers block access with barbed wire to the European Central Bank (ECB) in Frankfurt March 17, 2015.   REUTERS/Kai Pfaffenbach