The European Central Bank must proceed Thursday, January 22 with the announcement of a major program of public debt purchases and the establishment, history, its first “QE”. Ten questions to understand everything
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1) What is EQ?
The QE for “quantitative easing” or “quantitative easing” is a tool that allows a central bank to maintain a loose monetary policy (specific to stimulate the economy) even when it lowered its rates to near 0%. QE is for the institution to massively inject liquidity into the markets by buying large amounts of securities, including government bonds. Through this, the central bank evicts investors, who should refer to other more lucrative financial assets such as stocks or corporate bonds, whose price increases accordingly (bond rates fall). Banks, they can refer to the distribution of credit to businesses and households. Another benefit: money creation lowers the price of the currency, which promotes exports. The effectiveness of QE however, depends on the economic environment in which it is integrated.
2) How is this going to happen
& gt;? How? The program could involve 50 billion per month over at least one year, or 600 billion of asset purchases. It must be large enough to increase the ECB balance sheet 1.000 billion, taking into account the measures launched since September.
& gt; Who It is moving towards a direct purchase by each national central bank?. Advantage: it would carry the risk by national states and not by the ECB itself. This would alleviate the concerns of Germany, is not conducive to the establishment of a QE. For now, nothing is decided.
& gt;? When According to a source quoted by Bloomberg, purchases of $ 50 billion per month will not would begin before 1 st March. The ECB had already donated time last June at the announcement of the first covered bond redemption measures and securitized loans.
& gt; What Essentially sovereign debt in the euro zone on the secondary market?. The question is whether the Greek and Portuguese debt will be excluded or whether the ECB will buy the assets based on the weight of each country in the composition of its capital.
3) What will it change for Europe?
The purpose of QE is obviously to boost the European economy so that it does not remain taped long-term growth and anemic inflation, around 1%. The ECB has emphasized its mandate to stabilize inflation around 2%, but the QE test coordinates with a more general shift in European economic policy. Around the revival of investment, especially with the Juncker plan and more flexibility given to fiscal policy in exchange for the implementation of structural reforms. At best, if everyone respects its roadmap, growth will return. If states do not fulfill their part of the bargain, reforming and ensuring their public spending, QE is not enough to boost growth. Finally, in the worst case scenario, if some states could not repay their debt, QE would have a redistributive effect, losses collected by the ECB to be offset by the Eurosystem. Therefore it is unlikely that the ECB includes the Greek bonds in its sovereign asset purchases.
4) France she will enjoy it?
Like other member states of the area Euro, France will draw benefits from probable repurchase sovereign debt by the ECB. But France is not first in line, and the benefits have already materialized. According to the Bank of France, in the third quarter 2014, when the financial markets have anticipated the introduction of such a measure, the interest rates paid by businesses were “down sharply” . Thus, the rate for long-term credits are past three months of 2.44% to 2.28% on average. The state is also winner: the French 10-year rate stood Wednesday below 0.65%, against 1.7% in early July. Finally, the decline of the euro since last summer, partly induced by the prospect of sovereign debt buybacks, promotes French exporters. It is not by chance that the government is pushing for months for a share of the ECB. But it is not, however, the repurchase of sovereign debt that will pull the business in 2015, interest rates are already very low, unlike the countries of southern Europe.
5) Why is Germany very reserved?
Superfluous, against-productive and potentially dangerous. German economic policy and decision makers are very reserved on the sovereign debt purchase program to be announced by the European Central Bank, even if they do not publicly challenge the (except the president of the Bundesbank). First, Berlin considers inappropriate timing, three days before the Greek elections. Second, the government does not share the alarmist diagnosis of the ECB, saying almost no risk of a deflationary spiral and anticipating a recovery, with falling prices of oil, already historically low interest rates and the effect of the reforms here and there . Third, as she said Monday, Merkel fears that this removes the pressure on the states of the euro area – such as France and Italy – to carry out structural reforms it deems urgent. Finally, there is a cultural aspect: the Germans fear nothing so much as inflation and a weak currency, which is the aim of QE.
6) Why the ECB she wait so long?
There was a difference interpretation of the impact of the financial crisis in Europe. Where Americans saw a powerful and persistent shock, Europeans believed in a cyclical shock. In 2011, so they preferred the austerity policies – where Anglo-Saxons have pursued a highly accommodative monetary policy – which has led to a very slow recovery from the recession in Europe. The economy in the euro area is also still extremely low. Aware of this error, Mario Draghi, the ECB president, warned as early as last summer that he was ready to intervene much more massive scale, as medium-term inflation outlook began to stall. But he first wanted to test some instruments (repurchase securitized loans, bank bonds, targeted loans to banks). And he had to also take the time to fight the hostility of Germany and within the ECB, the governor of the Bundesbank, who see the easing of monetary policy undue deficit financing of states.
7) How QE can he fight against deflation?
With a very low growth in the area euro and very low inflation (the index of consumer prices fell to -0.2% in December), the risk of deflation has become real. And while the fall in the price of oil as raw materials adds to deflationary pressures. Private demand, whether consumers or investors, is also very poor so there is no pressure on prices. One of the aims of QE is to lower the euro. Putting a lot of liquidity in the market, the value of the currency is devalued. This is designed to increase the competitiveness of European industry and help exports. The other objective of the central bank, buying sovereign assets, is to push investors to move into riskier assets, to release and ease credit conditions. All this should help finance the economy by taking the force will renew with inflationary pressures.
8) QE: cohesion or division
Using for the first time a tool already wield central banks, the ECB is taking a huge step towards the integration of the euro area. “The ECB is like all the major central banks of the world, is a historic step, the end of a taboo,” welcome the group of Social Democrats in the European Parliament. After the creation of the European Stability Mechanism and the development of the banking union, the QE further unites the eurozone. However, in the short term, it will heighten tensions between the 19 states of the euro zone, especially with Germany, which opposes what it sees as a further step towards the pooling of debts of the States, the Treaty prohibited. Germany may also be extremely rigid in the coming weeks, as the debate on the reduction of the Greek debt, as issues of compliance with fiscal rules (the Stability Pact). It is likely that calls for new sanctions regime to require closer monitoring by Brussels structural reforms promis ed by the States.
9) It will change anything on the market
A first observation: the markets have partly anticipated the announcement of QE. Yields on government bonds are at historically low levels and European stocks are close to their highest since 2008. It is therefore possible that initially the reaction is negative, as the saying goes: “One buy the rumor, sell on the news. ” Especially there is a risk of disappointment with the ads. However, in the medium term, the influx of liquidity in the financial markets should have a positive impact, especially on risky assets such as stocks. The zero interest rate policy of the ECB encourages indeed from investors seeking yield. But the average return on equity in the euro area – via the Euro Stoxx – 3.5% end of 2014. The decline in the euro, which follows from the plane, is also good news for corporate profits zone. Finally, government bonds, the arrival of a major player such as the ECB could unbalance the supply and demand, pushing u p bond prices.
10) Can the euro fall further?
Unanimous, markets anticipate a weak euro and sustainable manner. They base their expectations including the fact that all the quantitative easing QE programs previously carried out in other countries (USA, Japan …) have lowered their currency very significantly. Thus, the first two QE in the US did they back the dollar by 3.6% to 10.8%, according to exchange rates. QE of the European Central Bank (ECB), if implemented, should be consistent with these observations. As well as the continuing decline of the euro is the generalization of its decline is important for the competitiveness of enterprises. However, since the beginning of September, the euro lost 12% against the greenback but its exchange rate against its major trading partners has sold “only” 6%.
Isabelle Couet
Pierrick Fay
Anne Bauer
Guillaume De Calignon
Thibaut Madelin
Virginia Robert
V. R.
A. B.
P. F.
Ait-Nessim Kacimi
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