The ECB and other Central Banks took extraordinary actions to reduce the impact of the recent financial crisis. However 10 years on, in a paper sponsored by NEX, Professor Avinash D. Persaud, Emeritus Professor, Gresham College argues compellingly that the architecture of European financial markets needs to be modernised and monetary support for Eurozone government bond markets must end. Now. He argues, “The seeds of the next crisis are sown in moments like these when the authorities have been bold, they have done the job, but no one wants to run the risk of exiting from the policy ‘early’.”
In the paper, “The Future of European Bond Markets” he argues that technology can be used to introduce increased diversity of participants and improved balance between well-capitalized, long-term investors and short-term investors to enhance liquidity.
To arrange an interview with John Edwards, Managing Director of BrokerTec EMEA or Godfried De Vidts, Director of European Affairs, NEX and Chairman, ICMA European Repo and Collateral Council, please contact Candace Adam/ Michelle Gathercole at Argentus PR: Candice.adam@argentuspr.com / +44 (0) 20 7397 2915 or michelle.gathercole@argentuspr.com / +44 (0)20 73972949.
Please see below the Executive Summary and attached, a full copy of the paper.
Executive Summary
- Government bond markets lie at the intersection of politics and markets. Following elections in Germany, France, and the UK, a moment has arisen in Europe where the need to modernise the architecture of European financial markets is now matched by the political willingness and leadership required to do so. It is a moment to be grasped by all; it will not last. The stakes have never been higher.
- The ECB must set a clear exit path for monetary support for government bond markets: downsizing is not enough. This is how boom-bust persists. Booms are enabled by over-easy financial conditions lasting too long. Booms do not always show up in consumer inflation but in the kind of growth. It matters that while the economic recovery is gathering, real investment and productivity continues to disappoint.
- The postponement of exit reveals that European officials are uncertain as to whether EMU reforms so far are adequate to safeguard against a repeat of the credit crisis or a return to a winner takes all government bond market. Market participants worry that left as they are, reforms have crimped liquidity. Officials are right to be concerned over the inadequacy of EMU reform, but they are wrong to postpone exit because fixes are available.]EMU reform should build on what has worked and focus on the problems to be solved, especially their liquidity character, not imaginary concerns or those that perpetuate a “core” and “periphery” split within the Eurozone. The stars of a more resilient EMU already exist; just their constellation needs re-orientation. New institutions and new instruments are not required.
- Macro-prudential regulation needs to be recast to take better aim at national booms. The authorities need to shrink those areas mostly exempt from competition policy. ECB bond purchases should be conditional on haircuts, domestic policies to close balance of payments deficits in a reasonable time, and a program of investments in trade integration. Capital requirements need to be augmented with FinTech to bring greater diversity into primary bond markets.
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