The purchase of government bonds by the ECB seeks to avoid deflation in the area, which would be worse than high inflation.
The decision of the European central bank did not come as a surprise to stock markets . File Photo: AFP
The European Central Bank (ECB) launched a last resort monetary policy on Thursday, announcing a program of purchases of government bonds to inject hundreds of billions of euros in fresh to the ailing economy of the euro area money.
The ECB President Mario Draghi said the bank will buy government bonds of governments from March until the end of September 2016, despite the opposition of the Bundesbank, Germany’s central bank, and concerns that Berlin prone countries increase spending curb its economic reforms.
Along with existing to buy private debt and channeling hundreds of billions of euros in cheap loans to banks schemes, the new quantitative easing plan will allocate 60,000 million euros per month to the economy, Draghi said.
By September 2016, they have it created more than 1 billion euros, the last major monetary policy tool left to the ECB to revive economic growth and protect the region of deflation.
slumps the euro
The wave of money impressed the market, causing a collapse of the euro two cents to $ 1.14108 and a rise in European shares to a maximum of seven years.
” Mario Draghi took larger than investors expected bazooka “said Mauro Vittorangeli, fixed income specialist Allianz Global Investors, who saw the news as a historic crossroads for European markets.
buy bonds on the secondary market in such proportions that the major economies will receive the biggest purchases of debt by the ECB.
The prospect of drastic action by the ECB had led the Swiss central bank to abandon roof for frank while Denmark, whose currency is pegged to the euro, was forced to cut interest rates for a second time this week- in anticipation of a surge of money.
The central bank Danish intervened to weaken the crown before the announcement of the ECB.
The former ECB official, Athanasios Orphanides, said the move announced Thursday already long overdue.
“Now that the situation has deteriorated, the ECB will have to do more,” he said.
Draghi has had to balance the need to take measures to encourage the economy of the euro zone off fears Germans on shared risk and Berlin potentially end up paying the bill.
The tensions erupted, while the meeting was in progress when the French finance minister, Michel Sapin, launched criticism of Berlin.
Will it work?
Draghi said 20% of asset purchases will be subject to joint venture, suggesting that most of any potential loss will fall upon national central banks.
Critics say it calls into question the concept of the euro zone to share risks and that countries with debts that are already high could meet even greater liabilities.
Inflation Eurozone turned negative territory last month, well below the ECB’s target rate close to but less than 2%, generating fears of a Japanese-style deflationary spiral.
But there are doubts, and not only in Germany, whether printing new money work.
Most bond yields in the euro zone is already in ultra low levels while the euro has fallen significantly against the dollar .
The lower financing costs and a weaker currency could help boost the expansion, but there are doubts about how much more could fall.
“It’s a mistake to assume that QE is a panacea in Europe or it will be enough, “said former US Treasury Secretary Larry Summers, at the World Economic Forum in Davos on Thursday.
” There is every reason to believe that quantitative easing will less impact in a context like this in Europe than in the context that was America, “he said.
A slump in oil prices has caused shock among central bankers around the world.
The ECB has already cut interest rates to record lows. Thursday also said unchanged its main refinancing rate at 0.05 percent.
Greece and Cyprus, which remain under bailout programs of the EU and the IMF, may be part of the program, but subject to stricter conditions.
The ECB announcement Thursday takes place just three days you have elections in Greece, where the favorite game is opposition SYRIZA, which rejects the bailout terms.
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