Nenad R.: What are the consequences of quantitative easing by the ECB? Since every state is currently in debt, the ECB is printing vast amounts of euros, does this not lead to high inflation in the worst case? What happens if every state gets heavily indebted, who pays the debts?

Answer by Stefan Pichler, Professor for Banking and Finance:

You are obviously referring to ECB’s Public Sector Purchase Programme (PSPP)which is in place since 2015 and the currently released Pandemic Emergency Purchase Programme (PEPP). In both measures the ECB buys bonds issued by public sector debtors on the secondary bond market. End of February 2020 the notional amount of public sector bonds purchased by the ECB had a total of 2129 bn EUR and this amount is expected to increase due to the PEPP. To be precise, the ECB is not printing money (not in a literal sense). Although there are some similarities between the printing of money and asset purchases there are also important differences. The main difference is that bonds have a natural redemption scheme, i.e. a certain amount of money is paid back to the ECB per year ‘automatically’ (for the forthcoming year ~185 bn will be redeemed). In the end all bonds will be redeemed at some day given that no debtor defaults on his obligations. This implies that only those amounts which will not be repayed because of defaults are fully equivalent to “printed money”. In addition, the ECB can always sell bonds in the secondary market to immediately reduce the monetary base. More technically speaking, the PSPP allows for a by far better fine tuning of monetary policy than printing money. As a consequence, the ECB has a very good toolbox to control for unwanted increases in inflation. This is the main reason why we did not see any increase in the inflation rate above the ECB target of 2%.

The second question (Who pays the debts?) has a simple answer: The debt is usually repaid by the contractual obligor. Only in the case of a default the debt is indirectly paid by the creditors. So in the most likely case of no public sector default the debt is repaid by current and future tax payers of the issuing country. In the case of a public sector default bond holders will pay the bill. The biggest portion of public sector debt is held by (life) insurance firms, mutual funds and pension funds. The ultimate risk owners behind these institutions are individual insurance/pension beneficiaries and individual investors. Smaller portions are held by other banks (including the ECB) and corporations. In such a case a significant part of the burden is shifted to other countries as well.