The ECB announced this week that it was going to start buying investment grade corporate bonds. Several people in my Twitter feed pointed out that there was a problem with this. This chart posted on marginal revolution by Tyler Cowen makes the point. There are practically no eligible corporate bonds in Eurozone peripheral countries. Unless the bond buying program was miniscule, there would be no chance of mimicking the kind of geographical ‘neutrality’ you get with changing the ECB policy rate. And, bearing in mind that the need for stimulus differs greatly by country, it is perverse that the stimulus imparted by this bond-buying will be weakest, or even absent, where it is needed most.
This could be fixed with fiscal policy. Imagine the following. The ECB buys a ton of bonds issued by large French and German corporates. This raises those bond prices. A Eurozone fiscal agent computes the stimulus effect for France and Germany, including, amongst other things : the direct subsidy for the corporates, the consequences for public finances in France and Germany of more spending, via the automatic stabilisers. Taxes are raised in those countries to offset some of that stimulus, and this is used to finance temporary tax cuts in the periphery, equalising the stimulus across the Eurozone. To make this fair the ECB would have to drop the requirement that the bulk of the risk of bond-buyng was born by the national member central bank whose bonds were bought. If the benefits were to be distributed equally, then so should the costs.
Of course, thinking through this reveals a rather obvious point. That a much simpler policy would be to implement a fiscal transfer from North to South [roughly] in the Eurozone, calling the analysts at the ECB to tell them that they can have their weekends off after all. My rather convoluted fiscal policy would only be appropriate if fiscal policy was ‘maxed out’ in the North, which is nowhere near being the case, and the bond buying there was a way to squeeze out more tax revenues.
Sadly, the simple transfer is not going to happen. [Nor the complex one].
This doesn’t mean that the ECB are doing the wrong thing. Some inappropriately distributed stimulus is better than none. The periphery trade with the core. And avoiding a recurrence of the sovereign-bank doom loop in the cost of finance in the periphery depends on avoiding it entirely in France, Italy and Germany, which policies like this will help.
But the ‘unfairness’, or peverse targeting of the ECB’s credit easing does raise the issue of whether eligibility might be extended. Whether some framework could be devised that buys sub-investment-grade at an acceptable level of risk, and an acceptable level of risk of being gamed by the sellers of those bonds.