LTRO vs QE
When Ben does IT, the markets get the needed boost. When Super Mario does IT, the markets don’t want to do the same thing. The first effects of the LTRO were positive, but this has all faded away, and the major countries, Spain and Italy, have once again fallen back into the abyss. Why isn’t Europe reacting as positively as the US markets to QE/LTROs? By Voxeu.
The ECB has managed a massive expansion of its balance sheet with long-term refinancing operations. This has been called the equivalent of quantitative easing, as done by the Fed and the Bank of England. This column thus argues that the main obstacle for the ECB is not tight limits on the purchase of government bonds. Rather, it is the absence of a banking and fiscal union and the heterogeneity within the Eurozone that reduces the effectiveness of the ECB instruments.
With the launching of the three-year longer-term refinancing operations (LTROs) in December 2011, the Eurosystem has entered new territory (see Wyplosz 2012). Its balance sheet (stripped out of foreign-exchange reserves and assets that have no relevance for monetary policy such as legacy assets of the national central banks) has jumped from about 5% of GDP before the crisis to about 10% in 2009–10 and now close to 18%. This is only marginally lower than the levels reached by the balance sheets of the Bank of England and the Fed (respectively 23% and 20%, again without foreign-exchange reserves and other assets of no relevance).1 On the face of it, Mario Draghi seems to be emulating Mervyn King and Ben Bernanke, but with a lag (Figure 1).
Figure 1. Total asset size (% of 2007 GDP)
The ECB’s language is ambiguous. On the one hand its explicit separation principle states that whereas quantitative easing à la Fed is a substitute for conventional easing once the policy rate has reached the zero bound, the ECB’s non-conventional operations only aim at ensuring a proper transmission of monetary policy and could conceptually be undertaken at any level of interest rate (Fahr et al 2011). On the other hand the ECB emphasises that it is doing much to prop up the economy.
Full must read article here.