Pierre Lagrange is a co-Founder of GLG Partners, a wholly owned subsidary of Man Group Plc (LON:EMG). Man Group Plc (LON:EMG) with $59billion under management, is one of the largest hedge funds in the world.
Pierre recently authored a white paper titled ‘LTRO: a soft belly into a six pack, but shocks remain, A dose of Draghi.’
Pierre has some harsh words for quantitative easing used by central banks to increase the money supply by usually buying government securities.
Pierre stated that:
Quantitative easing (QE) is a magic remedy, at least in the short term. Central bankers can conjure up money out of thin air and use it to purchase assets. Such activity has the capacity to transfer toxic debt, stimulate demand for risk assets, devalue currencies – thus deflating debt – and maintaining low interest rates on government securities.
The European Central Bank’s (ECB) more restrictive mandate does not allow it to print money for any other purpose than lending, so QE is out of the question.
Pierre thinks that this policy is not enough and concluded with some of the following thoughts:
There is also increasing evidence that most of the monies from the LTRO have been spent or earmarked, more quickly than the markets thought, and we will soon need the next measure to prevent rates rising excessively in the periphery. As the private sector has already used a lot of its purchasing power, central bankers will soon, in spite of their reluctance, find themselves needing to buy government debt in the secondary market.
How they do it and what it leads to is important. There is a variety of tools they can use, from securities market programmes (SMP) to a relaxation of ‘haircuts’. They can also allow Spanish banks to issue government guaranteed debt, essentially creating ECB eligible collateral, similar to what Italian banks have been able to do. SMPs were stopped after the LTRO, but can be reactivated, we
hope sooner rather than later, as the markets need to understand the central banks are committed to preventing rates from spiraling out of control.