Thread by @fsaraceno

This FT piece on deb #cancellation is interesting and poses a few interesting questions.

Let me begin with what I do not like.

The case against cancelling debt at the #ECB ft.com/content/6e112e…

#monetization 1/

The excessive focus on Italy is off the mark. Any serious discussion on sterilizing this exceptional debt linked to the pandemics should concern all EMU countries. All have had a spike in deficit

2/

Nor I like the argument that debt sterilization would not bring fresh cash. It would not, and of course it would not be needed. EMU public debt is today (and for a long period to come) in excess demand. On top of that the ECB will keep the PEPP umbrella open for a while

3/

Sterilizing the EMU pandemics-related public debt is a medium term issue, related to future fiscal space. Will this exceptional stock of debt that built in 2020 constrain EMU countries in their ordinary fiscal policies in the future? This is the question to ask
4/

If the answer is yes (I believe it is), then sterilizing that debt is eventually going to be an issue to be dealt with. And the ECB will have to be part of the solution
This is what the FT seems to suggest too (this is why the piece is more complex than it seems)
5/

The piece suggests that extending the maturity of debt (in principle to perpetuity) should be a solution. If the ECB were to buy that debt, we'd have monetization
6/

A side note: The macroeconomic impact of cancellation and of monetization are alike. But cancellation poses a number of (mainly political) issues. I'd take it off the table and discuss pros and cons of a permanent increase of the ECB balance sheet (monetization/reservization)
7/

The piece then goes on with a discussion of helicopter money (and an obscure link with debt write-off) in managing deflationary pressures.
What is interesting is the last sentence of this paragraph:
8/

The initiative should come from the ECB in pursuing its objectives, not from governments. I made the exact same point a couple of days ago (in Italian, unfortunately).

Interestingly, the strong independence of the ECB in this case could help.
9/
editorialedomani.it/idee/commenti/…

So in the end the case against cancellation boils down to timing and to the opportunity that politicians (especially Italians) bring it up now.
But the FT acknowledges that the issue is on the table and that sterilization may be part of the equation.
I am ok with this
/end

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