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Thursday, January 22, 2015

Draghi announces ECB asset-purchase plan of 60 billion Euros a month

by  Dan Alexe As was eagerly expected, the ECB announced that it will start buying its 19 member states’ bonds next month, in a process also known as quantitative easing (QE), that is: large-scale purchases of government bonds with newly printed money to stimulate Eurozone's sluggish economy. The announcement was made by Mario Draghi, the president of the European Central Bank (ECB) in Frankfurt on Thursday (22 January). With a wry smile, apologising for being slightly late ("don’t read too much in this small delay - it was the elevators”), Mario Draghi said the combined programme of buying both state and private securities will reach 60 billion euros per month until the end of September 2016, "or until we see a sustained adjustment in the path of inflation”. Draghi also announced that the ECB will keep its interest rates unchanged and outline a mechanism of loss sharing in the future programme of bonds buying, or "quantitative easing”. Markets were eagerly waiting to see just how much financial firepower the European Central Bank will unleash on Thursday. The decision to use bond purchases, or "quantitative easing", follows in the footsteps of the U.S. Federal Reserve — as well as the Bank of England and the Bank of Japan. The Fed bought bonds from 2008 to 2014 — and got credit for helping jump-start an increasingly robust U.S. recovery. Europe definitely needs a push. Growth is weak, unemployment is 11.5 percent and inflation is minus 0.2 % annually, which has raised fears the region could face chronic deflation. Bond purchases fight that by pumping new money into the economy, raising inflation and making credit cheaper and easier to get. The euro would thus fall, boosting exports. Still, the US, the Fed and the ECB inhabit different economic landscapes. The ECB's job is complicated by a host of factors.  Thus, the Federal Reserve could buy bonds in well-established, reasonably safe markets for Treasuries and mortgage-backed securities. The ECB has 19 governments and bond markets to choose from — ranging from super-safe Germany to shaky Greece. It needs to decide whose bonds to buy and whether or not to include risky ones too. Draghi has also a political battle on his hands with Germany, which has clout because of its dominant role in the European Union. Two German members of his 25-member governing council have recently expressed public skepticism about bond purchases, worried that such a move would mean German taxpayers would be handed the bill in case of bond default from less prudent Italians and Greeks.  German Chancellor Angela Merkel has neither endorsed QE nor condemned it. Some analysts were worried that Draghi may be forced to compromise on the size of the program, leaving it too small to impress markets. It was thought that a program of at least 500 billion euros per year, with flexibility to do more, would be a positive surprise. At 60 billion per month, Draghi goes further than what was considered the minimum threshold. European companies get most of theirs from banks, not from the bond markets as do US firms. That means driving down bond market interest rates doesn't help as directly.     


READ THE ORIGINAL POST AT www.neurope.eu