Writing an opinion piece for the Financial Times on Monday, former ECB Executive Board member Lorenzo Bini Smaghi warned that recent market behavior is uncomfortably familiar. "The shadows of the 2011-12 crisis are emerging again," he wrote, citing "the widening of spreads between the government bonds of core and peripheral countries, with France being treated by markets as part of the periphery." His message to Frankfurt: stop shrinking the balance sheet for now to remove one avoidable source of uncertainty.
Quantitative tightening decides how much government debt the market has to absorb alone. Market Briefs follows central bank balance sheets free every morning.
Bini Smaghi wants the ECB to stick with its standard lever of interest rates rather than pairing rate decisions with a slow run-off of bonds accumulated through the past decade's unconventional programs. As he put it, "Changing the size of the balance sheet should be regarded as a secondary instrument." He cautioned that balance sheet reductions "may actually produce undesirable effects that are not yet fully understood." His bottom line: "The principle of prudence would therefore suggest putting QT on hold until a more stable environment has been restored, while taking the time to better understand its implications for financial markets."
In the latter part of 2011, as Mario Draghi took over as president, Bini Smaghi departed the ECB. He subsequently chaired Société Générale SA, from which he stepped down in May of this year. Earlier that Monday, Lazard Inc. announced it had brought him on as a senior advisor. The through-line here is experience with market stress and the politics that come with it, which is why his call to simplify the ECB's playbook will get attention.
Pausing the roll-off would change the supply picture for European bonds. Get the free Market Briefs daily newsletter and watch the debate.
