Bundesbank Board member Joachim Nagel Tuesday cautioned of an emerging mispricing of risk as Eurozone government bond yields approach pre-crisis levels.
“In the run-up to the crisis, risks were generally mispriced and it is questionable whether risk premia should return to levels seen before the crisis,” Nagel said in a lecture at the central bank’s own university of applied science in Hachenburg.
“It would certainly be a beneficial development if risks were priced more accurately than previously,” Nagel asserted. Describing the current risk assessment as “too lax”, Nagel said that policymakers must stay alert.
Government bond yields have fallen significantly since the height of the crisis. Italy, for instance, sold five and ten year bonds at all time lows of 1.35% and 2.81% respectively on June 27.
Bundesbank President Jens Weidmann in May used low government bond yields as an argument against quantitative easing: “Why should the ECB intervene in these markets to try and depress these rates even further?,” he asked.
Nagel also cautioned that unlimited liquidity provisions hamper a necessary reduction of inefficiencies the euro area banking system.
While he conceded that non-standard measures during the crisis and been justified and that there is no foreseeable exit from the measures at present, Nagel argued that policymakers must steer money markets back to normality.
“Normalisation of money markets must be supported – also to reduce existing inefficiencies in the bank and financial system,” he said.
Nagel’s comments echo those of the Bank for International Settlement, which cautioned earlier this week that the low interest rates and abundant liquidity subsidizing the Eurozone financial system may have kept alive so-called ‘zombie banks’ that in fact need to be wound down.