QE is no debt relief

There was a little Twitter exchange on the nature of the ECB’s QE programme between Paul de Grauwe and Marcel Fratzscher. Paul sees QE as a sort of debt relief and asks why the ECB grants such relief to Germany, France and Italy but not to debt-burdened Greece. If you think of QE as a sort of debt relief, Paul’s question is legitimate, after all Greece would benefit most from a debt relief. But that is not what QE is or should be.

First of all, it is not the ECB’s job to grant debt reliefs to anyone, the very least to states, because this would then be monetary state financing, which is explicitly forbidden by the treaties. QE, whether you agree with the ECB doing it or not, is monetary-ish policy, aimed at increasing the money supply directly, bypassing the banks, in order to push the term structure further down, when the nominal rate is already at the rock bottom.

The ECB tries to reduce refinancing costs for the banks to achieve two things. First, nudging banks to lend more to ailing industries and second to help banks restructuring to the new stricter rules of financial stability. It has the additional effect that governments’ interest rate payments go down, since the ECB purchases government bonds. That is of course a welcome effect for finance ministers and the budgets, but it is no debt relief. Nominal debt stays the same, but its present value shrinks. Also, if governments use the windfall gains from the lower interest rates to invest in productivity enhancing infrastructure, say, also the debt to GDP ratio will feel downward pressure due to more robust economic growth.

Coming back to Paul’s question, why the ECB does not grant “debt relief” to Greece, the answer is simple: Greece is not eligible before QE, because the ECB already owns a big chunk of the Greek debt. Purchasing more would cross the line of monetary state financing, something the QE programme is awfully close to anyway. Further, Greek debt is junk. Only the various rescue programmes prevent Greece from defaulting. This is a risk, the ECB deems to great for the central bank – and rightly so.

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I write about economics and politics. I take Ordnungspolitik seriously. While not blogging, I study monetary unions for my doctorate.