Banking Crisis In Europe Averted... This Year

Posen, who sits on the rate-setting Monetary Policy Committee (MPC), says that the ECB's loans to big European banks are a “game changer” and that the move should mean banks will be “okay for a year or two.”

However, Posen thinks that the lack of lending to SMEs is a much more immediate problem. Posen said at a Trade Union Congress forum that “it wouldn’t be the end of the world” if the BOE bought assets other than gilts.

However, as Posen pointed out in a Bloomberg Television interview afterwards, there is one possible problem with the BOE extending its purchases beyond government bonds to company debt: the U.K. corporate bond market looks too small for the BOE to effectively intervene. So, Posen says, Bank purchases are secondary to the bigger issue of the U.K.’s corporate bond market, which is under-developed compared with countries such as the U.S. or France. 

The lack of credit is a key reason why recoveries from recessions are so slow and uneven—the U.K. economy’s 0.2 percent contraction in the fourth quarter may be a sign of this. Business lending is a core problem that, Posen said, may require legislation.

Posen believes that QE works and may push for another 75 billion pounds of cash injections next week. But, even if the rest of the MPC agrees with him and goes for a third round of QE as large as the second, it won’t be enough to secure the U.K. recovery on its own.

Read more on the article here.