European Quantitative Easing and the devil in the details

Posted: January 23, 2015 in Uncategorized
Tags: , ,

The European Quantitative Easing (QE) has been announced and the market cheered has it is Euro 60bn per monthtill 2016 (just over E1 trillion) versus the expected 50-60.

Markets cheered at the surprise (the real reaction will be in a few days, after digestion).

So let’s focus on some details.

It starts in March 15, some details still to be unveiled.

The ECB, to make the Germans agree, had to put some conditions.

In theory the purchase will be shared 20% by the ECB and 80% by the national Central Banks. But also there is a conditions that limits the amount that the ECB can hold of a single nation. As the ECB helped already a lot the likes of Greece, Italy, Spain, Portugal….it means that the risk sharing for these countries will be 8% ECB – 92% Single Country. Practically if ECB buys 70 the National Central Bank buys 730!

This goes against the idea and pattern of European integration.

Greece comes even worst. As the various bailouts have already filled the ECB quota of Greek debt….no purchases of Greek debt until the first tranche of the bailout expires (conveniently in July/August, when the outcome of the elections will be very clear).

So we will need to see how Syriza (probable winner in Greek elections) will behave – but they are already toning down their requests. Similar situation for Cyprus.

The ECB can buy a maximum of 25% of single issuance (and 30% top of issuernot to distort the price- it looks like a nice clause, but it is actually the market distortion that helped the US Fed to do what it did. Plus it is not clear if there are enough bonds to buy at 25% of single issuances  which sums makes Euro 60 bn per month.

Take out:

– It is consistent with the “disintegration” (not economical, but political) of Europe in the long term

-it could be positive for the market (some more details in March)

-it probably will not effect the real economy  – to 2016 the real effect will be 0.2/0.8% on the GDP. So to bring the GDP growth to 2-3% you will need European QE2 and European QE3 like the Americans.

If you have the questions…..since they could see the US, why the ECB did not do immediately a QE1,2,3 of Eu3 trillions. They are not stupid – they simply cannot do it as the Germans say NEIN NEIN NEIN!! In reality Europe is in a worst position than US, so it should do like the Bank of Japan that is now compelled to buy everything – including shares.


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