miércoles, 11 de marzo de 2015

miércoles, marzo 11, 2015
ECB launches €1.1 trillion blitz as bond market dries up

'Our monetary policy decisions have worked,' says ECB president Mario Draghi, basking in the glow of recovery

By Ambrose Evans-Pritchard

8:32PM GMT 05 Mar 2015
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Close-up of European Union Euro notes
The euro slumped yet further after Mario Draghi confirmed there would be no retreat from the original plan to buy €60bn of assets each month Photo: Alamy
 
 
The European Central Bank is to launch a €1.1 trillion blitz of bond purchases from Monday to avert deflation and revive lending, finally joining the “QE club” a full six years after the Bank of England and the US Federal Reserve.

The belated move came as the ECB sharply raised its growth forecasts to 1.5pc this year and 1.9pc next year, leaving it unclear whether such massive stimulus is still needed or even advisable.
 
Year-on-year retail sales jumped 3.7pc in January as the delayed effects of falling energy prices feed through to household spending.
 
Mario Draghi, the ECB’s president, said the radical measures first unveiled by the central bank nine months ago had restored confidence and were starting to bear fruit, alleviating credit stress across every part of the eurozone.
 
“Our monetary policy decisions have worked,” he said. While coy in admitting it, Mr Draghi has already achieved much of his desired effect by driving the euro down 20pc against the dollar and the Chinese yuan since last spring.
 
The devaluation has proved a powerful form of stimulus, even if the eurozone’s inflation rate is still languishing at -0.3pc.

The euro slumped yet further after he confirmed that there would be no retreat from the original plan to buy €60bn of assets each month, mostly sovereign bonds. It touched an 11-year low of $1.10 against the dollar.

The pound has reclaimed all the ground lost against the euro since 2007, closing at €1.38 on Thursday.

Under the scheme, each national central bank in the ECB system is responsible for buying its own bonds, reducing the level of shared liabilities to just 20pc of the total. This leaves weaker countries at risk of a bad “feedback loop” if the EMU debt crisis ever returns. They will buy bonds with yields as low as -0.2pc, and up to 33pc of each country’s public debt.



Alberto Gallo, from RBS, said the circumstances are entirely different from America’s QE. The Fed was able to gobble up a vast supply of Treasuries as Washington ran budget deficits above 10pc of GDP. “In Europe, the net supply of investment grade paper will be negative,” he said.

EMU bond yields are already at unprecedented lows, with two-year rates below zero in seven countries. German, Austrian, Dutch and Finnish yields are negative even at five-year maturities. There is a chronic shortage of assets to buy as budget deficits keeping falling.

The problem is acute in Germany, where the government ran a budget surplus of €18bn last year and is retiring debt at a record pace, leaving nothing left for investors. The Bundesbank is nevertheless still expected to come up with its 27pc share of the stimulus. Germany’s two ECB members voted against QE, insisting that deflation fears have been greatly exaggerated.

Bundesbank officials fear the bank could faces losses – at least on paper – if QE succeeds in reflating the eurozone and reigniting growth. US Treasury yields rose by as much as 100 basis points in the early rounds of QE by Fed as the market bet on recovery, overwhelming the effect of the actual bond purchases. This temporarily reduced the value of the longer-dated bonds. While that was not a major issue in the US, it would be another matter in Germany, where criticism against QE has been vehement.




“There could be some whiplash for investors,” said Gary Jenkins, at ING Capital. “Anybody buying bonds at such low yields could suffer a large loss if yields spike. Markets could get aggressive if there is any sign that the ECB might end the programme early.”

For now, the problem is the opposite. Investors are still piling into the shrinking market that remains, driving yields even lower. Spain’s 10-year yields fell eight points to 1.27pc on Thursday, while Italy’s fell nine points to 1.77pc.

Banks, pension funds and insurers are not giving up their precious treasure lightly. Many are required to retain large bond holdings to comply with regulations. Global central banks have more freedom but they usually move with glacial speed, if at all.

David Owen, at Jefferies, said the EMU bond boom is not over yet. “We think the ECB will go ‘right down the curve’ to 30-year maturities to make their numbers add up. Yields could fall a lot further,” he said.

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