Mr Draghi is canny, very canny as they’d say in Scotland!
On 22 January, he managed to surprise investors with better-than-expected news; in the face of some opposition, he had to kick-start quantitative easing (QE) in the eurozone and he did!
While larger than expected, the ECB’s QE programme comes three years too late and will likely have little or no impact on the real economy beyond the risk of fostering the emergence of speculative bubbles… but it should improve the solvency of eurozone members!
Overall, though, our view is that the absence of such an ‘expanded asset purchase programme’ (EAPP) would have been more detrimental than will be its presence.
1 / The EAPP surprised us by its size and its length (at least until September 2016).
2 / Basically, the EAPP can be seen as printing money: the ECB will buy eurozone member state debt, which mechanically, all things being equal, should improve the fiscal balances in these countries. We will be witnessing a purging of public debt.
3 / The depreciation of the euro could accelerate if those selling bonds to the ECB reinvest the proceeds in currencies other than the euro, but it is by no means obvious that they will. A lot of the euros could well go into European equities, diminishing the impact of QE on the single currency.
4 / Eurozone interest rates have further to fall with the equivalent of EUR 8 trillion of bonds currently in circulation. But of these, half are held by foreign central banks and sovereign wealth funds who should not be expected to sell (they want to maintain diversification of their reserve holdings). A further quarter is held by banks whose need to respect liquidity ratios limits their ability to sell. Another quarter is held by institutional investors; the ECB has announced plans to buy 60% of the EUR 2 trillion held.
Let’s remember that over time, probably not before 2016, the ECB’s full-scale QE could fuel expectations of a rebound in growth and inflation. Ultimately, this would create rate hike anticipations that would crown the success of its QE policy.