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In John Kenneth Galbraith’s seminal history of the Wall Street crash of 1929, the economist coined the term “the bezzle” to describe the amount of undiscovered embezzlement lurking in the financial system.

When times are good, people are trusting and eager to make more money, so the bezzle expands. When the cycle turns, however, vigilance returns and the bezzle shrinks.

Between the crime and its discovery, there is a period when the embezzler has his gains but the victim is yet to experience loss. Mr Galbraith described this interlude as a “net increase in psychic wealth”.

Europe’s credit markets for years enjoyed a net increase in psychic wealth, courtesy of the European Central Bank’s quantitative easing programme, which from 2016 saw the central bank lend direct to large companies by investing in their bonds. While carried out by well-meaning technocrats, rather than the swindling stock promoters so vividly brought to life in the pages of The Great Crash, the market is due a reckoning all the same.

Scores of banks and bond investors were freely lending to investment-grade rated companies on not particularly onerous terms back in 2016. Yet the ECB determined that jostling its way to the front of this queue would boost investment and create jobs.

What it did create were immediate pricing distortions, with companies able to issue negative-yielding bonds for the first time — charging investors for the privilege of lending to them.

But a more worrying phenomenon is more akin to “the bezzle” Galbraith described. This is when investors did not merely lend to businesses at the wrong price, but handed their money to companies that they should not have lent to in the first place.

This QE bezzle was sometimes dramatically revealed even while central bank bond-buying was in full swing. Months after the ECB bought Steinhoff’s bonds in 2017, it had to dump the position at half face value amid an accounting scandal at the retailer.

Last year saw the rapid unravelling of psychic wealth in several European high-yield bonds. Belgium’s Nyrstar and Germany’s Klöckner Pentaplast saw debt they had raised with ease in 2017 crash to just a third of face value. More starkly, Italy’s CMC di Ravenna went from tapping the bond market in 2017 to defaulting in 2018.

Debt should not turn rotten so quickly. And while many investors have described these incidents as a return of “idiosyncratic risk”, can it really be described as idiosyncratic when it happens to lots of bonds simultaneously?

Having hoovered up almost €180bn of corporate bonds, the ECB stopped increasing its holdings in December 2018. The price of risk in European credit markets has already normalised somewhat. But we might have only seen the beginning of the sudden unwinding of psychic wealth.

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