Eurozone | Cancelling the ECB debt does not make economic sense

Should the ECB cancel the public debt it holds as a direct way to lower debt ratios and free up fiscal resources? Some prominent economists have proposed just that. But we think this isn’t a feasible option and would provide very little economic benefits while raising unnecessary risks.

What you will learn:

  • Even if governments could jump the legal hurdles, wiping out the sovereign bonds the ECB holds won’t free fiscal space to support other policies given that the burden of that debt is virtually zero for governments.
  • Low interest rates mean they have fiscal space if they wish to use it, regardless of debt levels.
  • Cancelling public debt would also leave a hole in the ECB’s balance sheet, which would need recapitalizing and could harm monetary policy credibility, spark financial instability, and hurt other assets such as corporate bonds.

Topics: Europe, Eurozone, ECB, Monetary policy, Coronavirus, Macro, Financial conditions

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