"Unleash The Toxic Sludge" - Europe's Latest Brilliant Idea To Fight Deflation
By now all of our readers, if not so much the ECB (even though we know they read us religiously too), are aware that the biggest problem in Europe is the continent's moribund, and record low, credit creation courtesy of a clogged monetary transmission pipeline which has resulted in a -2% "growth" in loans to the private sector, which as monetarists (and certainly Austrians) everywhere know is the necessary (if not sufficient) condition to stimulate inflation in a continent drowning in deflation.
This is also why, as we reported first back in October, rumors have been swirling that the ECB itself is now contemplating launching QE, although judging by the amount of endless chatter in recent weeks by both Draghi and Weidmann, it is becoming increasingly evident that Europe will do nothing and is hoping that merely jawboning will launch inflation as happened after Draghi's summer of 2012 "whatever it takes" speech. How ironic that two years later, Draghi will do "whatever it takes" to crush the Euro... except actually do anything.
And confirming that the ECB will almost guaranteed not do QE, is the latest report from the FT that "European regulators are preparing to get their hands dirty by easing rules on an asset class once labelled toxic sludge, in a bid to boost lending to credit-starved small businesses in the region." Translated - Europe is about to literally "unleash" the toxic sludge, i.e., all the worst of the worst debt that was the reason why Europe is in a 6 year-old depression, and hope and pray it somehow fixes itself.
The European market for securitisation has all but closed for business since the crisis, when the practice of slicing and dicing of loans into packages known as asset-backed securities was blamed for letting problems in the market for US subprime housing loans spread through the global financial system.
The EU is now seeking to revive the moribund market, an objective which is shared by the European Central Bank. Mario Draghi, ECB president, has hinted that were there sufficient liquidity in the market for asset-backed securities, the ECB would be prepared to buy them to counter the rising risk of deflation.
“We think that a revitalisation of a certain type of [asset-backed security], a so-called plain vanilla [asset-backed security], capable of packaging together loans, bank loans, capable of being rated, priced and traded, would be a very important instrument for revitalising credit flows and for our own monetary policy,” Mr Draghi said last month.
Michel Barnier, the EU commissioner responsible for financial services, will make it easier for insurers, one of the industry’s biggest potential customers, to hold these assets by easing capital rules on their holdings of relatively safe forms of these securities.
A revised draft of technical rules to implement Solvency II, the law governing the European insurance industry, seen by the Financial Times, reveals officials are planning to halve the capital requirements on securitisations deemed to be of high enough quality.
Under the changes, the capital requirements on the safest securitisations would be sliced in half from 4.3 per cent to 2.1 per cent.
The move is part of a broader set of measures to support financing to the bloc’s businesses, which rely on bank lending far more than their US counterparts. A pledge to rebuild a European market for the repackaging of loans is set to feature in an update on the European Commission’s green paper on the future of finance, due to be unveiled on Thursday.
Sigh. What else can one possibly add here but...
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