Super Mario looked quite smug with himself  after pumping over €500 billion of cheap money into eurozone banks through LTRO2, but not everyone is happy with him. The ECB balance sheet has swelled lately but not with quality collateral. In fact the Bundesbank is growing very concerned that Draghi is increasingly accepting low grade collateral and this is no way fixing the crisis, just pushing it further down the tracks. Super Mario basked in his own glory at the G-20 meeting in Mexico and boasted “The euro is now a safer place than it was at the time of the last G-20 summit in Cannes,” he said.

Only two days before Draghi made his G-20 presentation, Jens Weidmann, president of Germany’s central bank, the Bundesbank, spoke at the Mexico summit, and he had an entirely different message for his listeners. “The crisis cannot be resolved solely by throwing money at it,” he said.

There is a rift among top-ranking officials at the ECB, and it also extends between the majority of the ECB’s Governing Council and the Bundesbank. First, two leading German ECB officials — chief economist Jürgen Stark and Bundesbank President Axel Weber — resigned because the monetary authority was buying up sovereign bonds from Greece and Portugal. Then Weber’s successor Weidmann objected to the ECB’s purchase of government bonds from heavily indebted Italy.

Idea is good, but conditions are very generous

Now, Weidmann is rebelling against the manner in which Draghi is giving European banks one new cash injection after another. Although Weidmann admits that the measures are basically correct, their conditions are “very generous,” he complains — and expresses his total opposition to this policy in the jargon of the central bankers: “This can particularly become a problem if banks are discouraged from taking action to restructure their balance sheets and strengthen their capital base.”

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Last week, the conflict escalated to a new level. Weidmann complained in a letter to ECB President Draghi that the central bank was accepting increasingly lower-grade collateral in exchange for its cash injections. This poses a danger, he warned, as the central banks in the north of the euro zone are owed ever growing amounts of money by their counterparts in the south. If the euro zone broke apart, the Bundesbank would be left holding a good deal of its bad debt from so-called TARGET2 loans, which currently amount to some €500 billion ($660 billion), he warned.

Bundesbank now concerned eurozone may break up.

TARGET2 refers to the central banks’ internal payment system, which has accumulated massive imbalances during the course of the euro crisis. These inequalities aren’t problematic as long as the monetary union remains intact. So far, the Bundesbank has always played down this risk. But Weidmann’s about-face is a “disastrous signal,” say ECB executives because, for the first time ever, the Bundesbank “is no longer ruling out a break-up of the euro zone.”

With low interest rate loans and inflation kicking in the ECB along with the FED are hoping that people will spend money rather than saving. This would help the economy to recover. Why deal with the problem of debt when you can spend your way into the next bubble and worry later 😉

now that statisticians are registering the first signs of inflation. In February, the inflation rate in the euro zone didn’t decline, as expected, but instead rose by 2.7 percent, primarily due to the rising price of gasoline. Furthermore, on other markets where investors like to speculate with cheap money from the central bank, prices are currently rising — in the German real estate sector, for example.

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There’s simply too much money around. Indeed, all concerns are pushed aside on the stock and commodity markets and investors are buying like mad. Ever since the announcement of Draghi’s cash injections, the German stock index, the DAX, has risen by 20 percent — and prices for copper, aluminum and zinc have also increased sharply. The price of oil has jumped by 15 percent and a fine ounce of gold costs roughly 10 percent more than it did two months ago.

If additional cheap loans of this type are granted to banks, “there’s a big danger that new bubbles will form on the commodity markets,” says Eugen Weinberg, a commodity analyst at Commerzbank. He says the recent stock market rally is already “alarming.”

Source: Speigel

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