Draghi tap dances around the Bundesbank
Well after much expectation and not a little grandstanding by the ECB President, given that he turned up late, he managed to deliver a package that if its effect was to knee cap the euro succeeded on all counts, and given current momentum we look set to see 1.1200 in short order.
The reaction as far as equity markets is concerned has been more subdued but bond yields have fallen sharply to fresh record lows, which it is hoped will help boost lending.
In this context the currency war has been joined as the ECB announced that they would be expanding their asset purchase program to €60bn a month starting in March 2015, and would continue through until the end of 2016, with the purchases being investment grade only, which would exclude Greek bonds.
The program is an extension to the current Asset Backed Securities and Covered Bond program already announced. Any purchases will be based on the capital key of each member country, up to a maximum of 30% of any new bond issue. The rate on TLTRO’s has also been cut to the MRO rate at 0.05%, making it a significant easing program
Exceptions to the investment grade criteria for assistance could only be for countries in a bailout program, which appears to be a message to Greece, and its election at the weekend. So long as you remain in the euro then we will buy you bonds under certain conditions. If you leave, you’re on your own.
There will be no risk sharing on 80% of the asset purchase program and the bonds purchased will be anything from 2 years to 30 years and the purchase plan would include bonds with negative yields.
The decision was not unanimous and there was no vote.
While there is no question that this program appears to have beaten market expectations there remains no guarantee that it will have the required effect in boosting inflation, and encouraging banks to start lending.
As if to reinforce this message Mr Draghi was at pains to impress on European governments for the umpteenth time that they need to start structural reform programs and start liberalising labour markets, and their public sectors.
With yields already at record lows and growth continuing to be difficult to come by, the big question remains as to whether this new program will get the banks’ lending, with demand so low, and new regulatory requirements that mean they have to reinforce their balance sheets against new financial shocks. Unfortunately there’s the rub, as they will find it difficult to do both.
The other obstacle to reform is the reluctance of countries like France, Italy and other euro members to stop prevaricating on the political front and start targeting integrated structural reforms to help boost their economies. If this doesn’t happen then the likelihood is that we’ll be no further forward at the end of this program than we are now.
It’s been over 2 years since the start of Abenomics and we’re still debating how successful that has been.
To conclude today’s announcement is more than we had expected, and its crossed a number of Germany’s red lines, but the jury remains out as to whether it will be successful, in the absence of any political will to enact reforms.
This is likely to be the message that German Chancellor Angela Merkel will be passing to Italian leader Matteo Renzi tonight, as the political dust starts to fly in Germany.
The conversation is likely to be something along the lines of I’ve crossed some German red lines to buy you more time Matteo to enact further reforms, so you’d better not let me down!
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