Expansionary monetary policies are irreversible – Natixis

Analysts at Natixis believe the most likely scenario is that the expansionary monetary policies will remain in place because of their irreversibility. A return to a restrictive monetary policy would lead to serious problems for borrowers whose debt level is consistent with low interest rates, investors, due to higher risk premia when they have rotated significantly into risky assets and those investors with a liquidity gap in their balance sheet.

Key quotes

“Debt ratios have adapted to the very low level of interest rates. If interest rates rise, significant deleveraging would be needed by the government and the private sector to prevent borrower insolvency, leading to a drastic recession.”

“Low risk-free interest rates have driven investors into risky assets: the result has been a squeezing of risk premia (on corporate bonds, on peripheral euro-zone bonds). In the event of a return to a more restrictive monetary policy, risk premia would rise and investors would be hit with massive losses.”

“Investors have invested some of the liquidity created by central banks in illiquid assets (High Yield corporate bonds, private equity, real estate, infrastructure, etc.). A contraction in liquidity would trigger a crisis by forcing investors to sell illiquid assets at inevitably very low prices.”