- European Financial System is ‘Nearing a Grand Catastrophe’
The cheap money policy of the European Central Bank creates risk for the entire European financial system, a German economist said.
The European Central Bank purchased €85.1 billion ($94.8 billion) of debt in June as it increased its asset-purchase program, Bloomberg reported. The asset-purchase program is part of the ECB’s quantitative easing plan. The pace of buying in June compares with a target of €80 billion per month. Thus, the bank is directly investing into the European economy, bypassing the banking system.
This program creates significant risks while its advantages are questionable, financial expert Ernst Wolff said. He warned that the initiative may result in a total financial collapse.
The analysts explained that the ECB policy creates serious risks for small and less developed countries like Greece. At the same time, big economies like Germany take advantage of working with the regulator because the ECB acts in favor of rich and powerful investors.
In addition to corporate bonds, the ECB is buying government bonds. However, according to its rules, the bank cannot purchase bonds at a yield lower than the bank’s deposit rate, which is currently —0.4 percent.
However, Wolff noted, the ECB usually violates the rule, in particularly buying German government bonds.