Frankfurt, Germany.
The European Central Bank is preparing to enter uncharted territory as his decision to launch a controversial stimulus program to revive the economy approaches the euro zone. The meeting of the organization will be held on Thursday.
Your challenge is to orchestrate a plan to meet investors, has the approval of the more conservative members of the central bank and mainly help awaken from their slumber European economy.
The possibility that the ECB will embark on a program to encourage large proportions has already affected other central banks. The Swiss National Bank, for example, was forced last week to stop defending the stop was set at the value of the franc against the euro, which shook the foreign exchange markets. On Monday, the Danish central bank cut its benchmark interest rate ahead of the ECB decision possible.
The expectation that the company undertake a program to buy government bonds on a large scale are so entrenched that French President François Hollande, held on Monday a comment unusually direct to indicate that the ECB will decide on Thursday start buying government bonds. The central bank, which jealously protects its independence from political authorities, declined to comment.
A few hours later, German Chancellor Angela Merkel stressed that the ECB’s decisions are independent and warned that monetary policy should not substitute tax reforms needed by countries in the euro area.
Investors say the possibility that the ECB launch a massive stimulus plan is incorporated into prices. In a sign that the market provides for intervention by the central bank, about a quarter of sovereign bonds in the euro zone, a total of around 5 billion euros ($ 5.8 billion), provides a negative return, compared one tenth in October, Bank of America Merrill Lynch.
The ECB itself has encouraged such hopes by suggesting in recent weeks its intention to add up to one billion euros to its balance of assets. The sovereign bond market is the only large enough in Europe to provide that scale.
The challenge is enormous. The ECB has to revive chronically weak economies, such as France, Italy and Greece. Also faces questions about its role and identity, ie if an entity modeled primarily on the German central bank, the Bundesbank, which inherited its inflationary zeal, can adapt to the XXI century and use innovative tools to combat recurrent financial crisis and deflationary threats .
“The ECB should become a modern central bank employing this instrument,” says Paul De Grauwe, professor at the London School of Economics. “The only way to reach that goal is to do. Shows that there has to be a disaster. “
The bond purchases large scale, a policy known as quantitative easing, have become part of the arsenal of tools that central banks turn US , the UK and Japan to reduce interest rates long term.
Anyway, the ECB faces many imponderables, despite the experience of other central banks. There is a federal asset that the organism can buy because the eurozone lacks a common value of debt. Instead, there are 19 bond markets, from Germany, whose debt has a rating of AAA, Greece and junk debt status. Yields on bonds are located at historic lows in much of the region, suggesting that it is not much that the ECB will be reduced.
In addition, at a time when inflation ade Eurozone in 12 months was negative for the first time in five years and the bloc’s economy, which is around US $ 13.2 billion, expands hardly the reputation of the central bank as an institution that inspires more confidence in Europe may be impaired if the quantitative easing not quickly get the expected results.
“The biggest risk is certainly the ECB disappointed. Expectations are very high, “says Iain Lindsay, manager of fixed-income portfolio Goldman Sachs Asset Management, which manages $ 1 trillion in assets.
For the Germans, the purchase of debt public wakes phobias inflation and central banks that follow the instructions of politicians. “It’s a very risky operation taking into account the lack of incentives for governments to put their house in order,” says Jürgen Stark, German economist and former member of the executive board of the ECB.
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