elEconomista.es / Reuters – 5:06 – 17/01/2015
The purchase of government bonds by the European Central Bank (ECB), which despite that has not yet been formally announced, is given by hecha- be good for the eurozone for many reasons, but first and foremost is that there are already many alternatives to banish the specter of deflation.
Exhausted and conventional, with little effect of unconventional measures implemented recently, buying government bonds in the secondary market monetary policy is evident as the only way to print output to monetary policy.
Why deflation is so dangerous?
In the stagnant environment that seeks out the eurozone, deflation is a pitfall that attacks the waterline of growth economical. Paralyzes consumption and delay purchasing decisions, but also makes debts weigh more, because it erodes the rents. For the most indebted countries is a real drama, but it is no less to your creditors.
Although the reasons for deflation are not exclusively monetary, given that oil is responsible for the situation, it is the responsibility the European Central Bank to converge to the target inflation rate of 2 percent. The current situation carries the risk of prolonging the situation of stagnation in the eurozone, especially since no energy prices rebound either.
Why buying public debt?
Of all the methods that can be implemented QE -siglas in English called quantitatively easing, buying government debt provides enhanced because it relaxes the types of financing sovereign debt, which in also serve as directors of other types of system, which indirectly relaxes the cost of financing for the private sector.
If part of the public debt is removed and park on the ECB balance sheet, investors money will flow into other assets, supporting the placement of other securities in euros, so new bond issuers, before this favorable situation, they will choose to finance in this market. It certainly boost private investment essential for economic growth. The companies will demand fewer funds to the banking system, which must go further SME segment, so in need of funding.
Relax further risk premiums ease the eurozone budgets and improve compliance expectations public deficit countries with greater imbalances that, moreover, are largely the most indebted. Some of these countries also has an important public and private debt.
Depreciation of the euro
The depreciation of the euro is an effect that and is occurring, as the market has already discounted the stage of monetary expansion with significant declines in the exchange rate. It is obvious that the devaluation improves the expectations of foreign trade in the eurozone, but especially in the central countries that need to boost their exports to offset weak domestic demand. The purchase of debt by the ECB not done, the exchange rate risk turning around.
More cohesion euro members
While not imply in any way mutualisation of sovereign debt in the eurozone, it is a boost over the euro. Requires greater confidence of all members of the euro in its own currency, essential to convey that confidence abroad. It also reflects greater coordination between monetary policy and economic policies, as the former is more committed to the economic development of the eurozone with a clearly expansive measure.
How will benefit Spain?
According to the leaks, it is estimated that the ECB could buy 60,000 million euros in the secondary, about a quarter of the funding needs this year. Obviously the guys relax interest savings and thus increase demand, already strong. Although the risk of deflation in Spain is low, increases in inflation are necessary not only to avoid the slowdown in consumption but to facilitate the repayment of debts, positive given the still excessive leverage of our economy. Improving the financing of large companies outside the banking system, increase its result, their investment capacity and will have positive effects on employment, affecting indirectly facilitate financing to SMEs for release of bank assets. The devaluation will improve our foreign trade, with an increasing weight of extra-EU trade.
What are the risks?
The question of whether to incorporate the balance sheet ECB a large amount of sovereign debt rating could affect the institution of Frankfurt and reputation. If buying sovereign debt is made in proportion to the share capital, the basket of assets will have a mix of quite acceptable rating, then should not stain the solvency of European issuer. In addition, the rating of some countries could improve in the coming months.
The less enthusiastic this measure, Germany and its hinterland, see the risk of default if you remove the assumption may pose directly to a State banned by the EU Treaties, although the recent statement last Wednesday, the attorney general of the European Court of Justice seems clear these doubts.
funding is an extreme scenario, except in the case of Greece. To avoid this risk, the ECB may exclude the Greek debt, as it seems it will happen according to the German press, or acquire CDS (credit default). Thus, the insurer who in practice would bear the grief. In any case, the amount subject to this risk represent only 3 percent of the total volume, perfectly controllable.
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