We have said for many years that accommodative monetary policy completely removes the burden from politicians that would require them to actually make difficult decisions around fiscal reforms, and now Standard & Poor's is saying the same thing.
Speaking in London on Tuesday, S&P's top EMEA analyst Moritz Kraemer said that there was a strong relationship between government bond yields, an indicator of how much countries must pay to borrow, and their willingness to undertake structural reforms. "All of these (reform) efforts from the governments have really fallen by the wayside under the palliative that the ECB is providing" Kramer told the Euromoney Global Borrowers & Bond Investors Forum.
As the ECB policymakers have been urging governments to take advantage of the easy financing conditions to implement reforms, Kramer points out what everyone other than central planners have already figured out, which is that as long as the central banks monetize the debt, why face political difficulties and enact reforms – "The moment the pressure goes away, the action goes away as well" Kramer said.
Kramer also pointed out that in a normal interest rate environment, government deficits across the bloc would be 1.5 to 2 percentage points of GDP higher, which would force the issue of reform up the agenda for many states. "I'm not just talking of Italy's deficit being close to 3 percent, I'm talking of close to 5 percent, and there would certainly not be a surplus in Germany" Kramer concluded.
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Interestingly in recent months, the flood of central bank balance sheet expansion has flowed into bonds – exponentially enabling dysfunctional government – as stocks have given up tracking monetary-policy-maker largesse…
All of this we have tried to convey repeatedly over the years. As long as the central banks will continue to monetize the government's debt, and continue to push trillions of sovereign debt into negative yields, no pressure will ever be felt by any government to change its ways. Welcome to the party S&P.
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