Editor’s note: This article was first published in January 2015, on the day of the ECB’s announcement; the programme’s size and dates, the interest rates, the December 2014 eurozone inflation figure and the possible Greek bond purchases are of that time. The programme was later extended, and ECB rates have since changed several times.
By Silvia Pazos, team leader at Aspain 11 Asesores Financieros EAFI.
At last the ECB has reacted, moving from words to action by announcing its long-awaited debt-buying programme. From March 2015 until at least September 2016, the central bank will buy €60 billion a month of public and private debt, a total of €1.14 trillion.
This is undoubtedly more than the market consensus expected, although the figure includes the private-debt asset purchase programme already under way (some €12 or 13 billion a month), which buys covered bonds and asset-backed securities, as well as sovereign debt on the secondary market.
It should be noted that, in principle, purchases will only be of investment-grade assets. However, Mario Draghi, President of the ECB, pointed out in his press conference that “some additional criteria will be applied in the countries under EU-IMF programmes”. So although Greek bonds (junk bonds) are left out for now, Draghi hinted at the press conference that purchases of Greek bonds could begin in July.
Limits have also been set: no more than 33% per issuer and 25% per issue. Draghi explained that the central banks of the 19 member countries of the euro area will buy the debt, and that only 20% of the securities will be subject to risk sharing.
That means potential losses on that part would be borne by all eurozone members, mutualising the risks. For the remaining 80%, each central bank will buy its own country’s securities and bear the associated risks.
Under this programme, technically called the expanded asset purchase programme (EAPP), the ECB will buy assets with maturities of between 2 and 30 years, and the purchase of bonds with negative yields is contemplated.
Besides the new programme, the ECB has decided to cut the interest rate on the targeted longer-term cheap-credit operations already under way, the so-called TLTROs, setting it at the same level as the main refinancing operations.
It is also keeping interest rates at the record low of 0.05%, the marginal lending facility at 0.30% and the deposit facility at -0.20%. At Aspain 11 Asesores Financieros EAFI we had been arguing for several years that monetary policy measures of this kind were needed. The reasons were obvious, especially if we follow the ECB’s orthodox approach: its mandate is to keep inflation below, but close to, 2%.
In addition, the secondary goals of this road map include boosting economic activity and bank lending. Considering the risk of deflation and the constraints on the eurozone’s economic growth, together with the fall in the price of oil, QE is undoubtedly an emergency measure.
One criticism of the programme concerns the timing of the decision: had it been taken a year or more ago, we would have been spared some of the economic blows caused by restrictive national fiscal policies. The programme is undoubtedly being launched at a more difficult moment, when its effect will probably be smaller because the wounds in the real economy are much deeper.
We think it is positive that the ECB is not ruling out reconsidering the size or the timing of the programme depending on how effective it proves, just as other central banks, such as the US one, did in their day. In fact, the Federal Reserve carried out three rounds of quantitative easing, with a very well-judged gradual reduction of the programme (tapering) from December 2013 to October 2014. This gave a boost to the US economy and employment, and also to the stock market: the S&P 500 rose by more than 40%, especially during QE3.
The programme the ECB announced today can have consequences through several channels. We would highlight these:
- Lower risk premiums and therefore cheaper financing for euro area countries, giving them some breathing room.
- A weaker euro. Although the currency market had already priced in part of this move before the QE announcement, it would help countries exit the crisis through exports.
- Upward pressure on inflation, which according to the latest figure, for December 2014, is in negative territory, with euro area HICP at -0.2%. The fall in the price of oil in recent weeks has certainly been a decisive factor, but we must not forget that the data had already been pointing to the “Japanification” of the European economy.
- Supplying money to the banks, since they are large holders of debt. The aim is to end the squeeze on credit to businesses and households and, once and for all, get liquidity flowing into the real economy.
In any case, let’s not forget, as Draghi also mentioned at the press conference, that monetary policy measures need to be accompanied by fiscal measures and structural reforms aimed at bringing down the high unemployment rates in some euro area countries and improving the business environment, increasing households’ disposable income and thereby reviving domestic consumption.
At Aspain 11 Asesores Financieros EAFI we would like to add one suggestion: we need to change Europe’s production model from the roots up, because if we want to compete in the global economy, we cannot enter into free trade with countries such as the United States in the current scenario. We have to build the house from the foundations up. Let’s not repeat what happened when the euro was introduced: let’s avoid patching things up along the way and instead lay the groundwork for strengthening the European economy.
Featured image: Norbert Nagel, CC BY-SA 3.0, via Wikimedia Commons.
