Draghi Pushes ECB Closer to QE as Deflation Risks Rise
Euro-zone QE looks very real after Constancio offers justification, timing and detail
The European Central Bank has been hinting about outright Quantitative Easing (QE) as a possibility, and this includes president Mario Draghi, who mentioned it. However, some of his colleagues have played it down. It now seems more like a question of “when” rather than “if”: ECB Vice President Vitor Constancio talks about gauging it during Q1, according to the advance of balance sheet expansion.
The euro is on the back foot and sovereign bonds already seem to be pricing it.
Constancio not only mentioned the timing but prepared the justification: inflation threatens to continue on the low side on the background of low inflation. The sovereign bond buys would be proportional to each member’s economy. Buying bonds would be a “pure” monetary policy decision that would influence inflation expectations and the exchange rate.
Speaking of he exchange rate, EUR/USD is sliding in range and trading at 1.2455, still above support at 1.2440 and still riding on weak US data.
If we look at European bonds, we see Spanish 10 year bond yields at 1.92%, significantly below 2.226% in the US. Italy’s 10 year yields are at 2.14%. Germany’s yields continue digging lower, now at 0.75%.
The yield gap between the US and Europe is also supporting the dollar versus the euro.
Ahead of rate meeting, ECB's Lautenschlaeger sees very high hurdles to more easing
ECB Executive Board member Sabine Lautenschlaeger said on Saturday she saw little room for further easing of monetary policy despite a further fall in euro zone inflation.
She added that the effects of large scale sovereign bond buying would not be positive.
"For me, given the current situation, the hurdles for further measures are very high, especially for broad purchase programs," she said according to an official translation of her speech in Berlin, five days ahead of the ECB's next Monetary Policy Committee meeting.
Innovation in monetary policy was not a taboo, but must also not be an "end in itself", she said, adding careful consideration of its efficiency was necessary.
The ECB has cut interest rates to practically zero and is readying more buying programs that could include government bonds - known as quantitative easing - to ward off the threat of deflation in the euro zone.
Vice President Vitor Constancio said this week the ECB could make a decision on government bond-buying in the first quarter if the economy did not improve.
The purchase of government bonds would be viewed extremely critically in Germany.
Lautenschlaeger said the interest on national government bonds in the euro area didn't operate as a benchmark for all further refinancing operations, as is the case in Britain or the United States.
"In my view, a consideration of the costs and benefits, and the opportunities and risks of a broad purchase program of government bonds does not give a positive outcome at the current time."
German European Central Bank policymaker Jens Weidmann said on Friday it was illusory to think central banks could increase a country's growth potential for a sustained period of time.
The have no other exit any more
They have closed all the other doors
QE is far from being priced into EUR/USD – Goldman Sachs
The value of the euro weakened ahead of the ECB rate decision with EUR/USD dipping under 1.23. Does this imply that Quantitative Easing is already baked into the price?
The team at Goldman Sachs explains why the price of the pair is far from reflecting QE:
Here is their view :
Goldman Sachs expects the ECB to stay on hold at its December policy meeting on Thursday (ECB Main Refinancing Rate at 0.05%), and doesn’t expect further specific measures to be announced. That said, GS believes that President Draghi will likely reinforce the dovish stance adopted in his Frankfurt speech on November 21.
“Our European economists saw ECB President Draghi’s dovish speech on November 21 as signalling sovereign QE from the ECB, with a magnitude of at least €500bn (and likely closer to €1tn),” GS projects.
In that regard, given the sharp EUR/USD decline since this speech, some market players now believe that QE is already priced in. GS strongly strongly disagrees.
To make its case, GS discusses a round of analytical approaches, all of which are rough benchmarks and are hardly conclusive, such as the QE experience in the US and its impact on the USD.
“That said, they point to substantial downside for EUR/$ from here (we think at least 10 big figures), in line with our 12-month forecast of 1.15,” GS argues.
Draghi's QE Plan In Jeopardy After IMF Suspends Aid For Greece Until New Government
Things for Europe (and liquidity addicts around the globe) just got a little more complicated. Earlier today, moments after the failed Greek presidential vote pulled the forgotten topic of a Grexit up front and center, the IMF announced that it is suspending financial aid to Greece under its huge rescue program until a new government is formed. RTE quotes IMF spokesperson Gerry Rice who said discussion on the completion of the sixth review of Greece's bailout will resume once a new government is in place. Mr Rice added that the holdup in the program would not impact the country's finances in the short term.
According to RTE, German Finance Minister Wolfgang Schaeuble said Greece must stick to agreed economic reforms regardless of the outcome of the election. In a statement, Mr Shaeuble said "these tough reforms are bearing fruit, they have no alternative."
And while the symbiotic relationship between Greece and Europe has been well-known for a long time, with Europe pretending to fund Greece (when it was just paying the interest and maturities on Greek debt held by official European entities), and Greece pretending to reform (when it was really just resting), the charade has now been put on indefinite hiatus:
A negotiating team from the "troika" of creditors from the EU, IMF and European Central Bank, had been due to resume talks in Athens next month to wind up the €240 billion bailout and agree an interim, post-bailout programme.In a bid to reassure international partners, Syriza leader Alexis Tsipras has sounded a more moderate tone recently, promising to keep Greece in the euro and negotiate an end to the bailout agreement rather than scrap it unilaterally.
But he has stuck to his promise to reverse many of the tough austerity measures imposed during the crisis, reversing cuts to the minimum wage, freezing state layoffs and halting the sale of state assets.
There are two reasons why this is an issue: first, as we reported back in October, according to S&P absent substantial external capital inflows, Greece will be in default within 15 months. Actually make that 12 months now:
S&P estimates Greek financing needs for the next 15 months to be at EU43 billion. ... S&P estimates Greece will draw EU5 billion from intl bond sales, EU20 billion from internal mkt, EU12 billion from official lenders inluding the IMF in next 15 mos. S&P also forecasts Greece will repay EU3 billion in bonds held by investors who refused to participate in 2012 debt writedown, and if it doesn't then Greece will following Argentina in being held in "contempt to court" fo cramming down foreign law covenants.
The second reason is far more serious for the market permabulls everywhere, because in a world in which all the upside is due to central-bank driven multiple expansion, suddenly the ECB's QE which everyone is convinced will take place in Q1, has been put on hiatus as there is no way the ECB can commit to monetizing Greek debt at a time when the IMF may halt the check kiting scheme, whereby IMF funds the ECB using Greece as a pass-thru. What's worse: even the mere threat of a debt moratorium by Tispras whose prime ministerial campaign will be based on a platform of ending austerity and renegotiating the Greek bailout, means Draghi's hands are tied as the Bundesbank will declare check and mate on the Goldman apparatchik at the ECB should he engage QE only to see Greece exit the Eurozone and crush the ECB's monetization scheme when Europe is not a true federalized entity.
In any event, while the algos simply refuse to accept reality, or their math PhD programmers are just too dumb to grasp what happened today, things in early 2015 are already shaping up quite volatile. And perhaps most important, the Syntagma riot-cam, which has been in storage for the past two years, may finally make a come back.
ECB's Hansson says full-scale QE before Greek elections 'problematic'
European Central Bank Governing Council member Ardo Hansson said he would find it "problematic" to announce large-scale purchases of government bonds this month that included Greek debt.
The ECB is preparing further stimulus measures such as a quantitative easing program of large-scale government bond purchases ahead of its Jan. 22 policy meeting, when it could decide to act to address waning inflation expectations.
But Greece will hold a parliamentary election just three days later, with polls showing a lead for Syriza, a leftist party that opposes the country's international bailout program and wants to renegotiate its debt obligations.
"I'd personally find announcing a bond-buying program including Greek government bonds in January problematic," Hansson, who is the governor of Estonia's central bank, told Bloomberg in an interview conducted on Jan. 8.
"...When there's a chance that somebody will come and say I'm going to restructure our debt, committing to buy such bonds is near the borderline of what could be considered."
With the assumption of sovereign credit risk also a bone of contention for Germany's Bundesbank, the ECB is looking at several options for how best to structure any sovereign debt purchases in a currency union that lacks a common fiscal regime.
Hansson said he would prefer to buy corporate rather than government debt.
"The volume you could achieve is lower but I think the quality you'd achieve is much better as you don't have the concerns of monetary financing of governments, there are fewer financial stability concerns, you are not taking the pressure of governments to reform," he was quoted as saying.
Hansson was critical of the idea of just purchasing AAA-rated government bonds. But having national central banks buy government bonds deserved to be considered, he said.
"It has obvious benefits in terms of avoiding risks of mutualization of debts but would also reduce the unity of monetary policy," Hansson said.
He added that the steep drop in oil prices was "wonderful news" for most parts of the euro zone economy akin to a stimulus package, adding: "we're far from a deflationary spiral".
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Mario Draghi just pushed the European Central Bank closer to quantitative easing.
With euro-area data this week likely to show the weakest inflation since 2009, the ECB president used a high-powered central-banking conference in Jackson Hole, Wyoming, to warn that investor bets on prices have “exhibited significant declines.”
Stocks rose, the euro fell and bond yields dropped to record lows today as the comments fanned speculation the ECB is finally heading for a form of monetary stimulus it has long avoided. Draghi previously said that a worsening of the medium-term inflation outlook would provide a reason for broad-based asset purchases.
The Aug. 22 speech “was a major event and marked a turning point in ECB rhetoric,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. “We think the recent economic developments have increased the chance of outright QE as the next step.”
The yield on Belgian two-year government bonds fell below zero for the first time, and Italian (GBTPGR10) 10-year yields dropped to a record-low 2.44 percent. The euro slid to the weakest rate in 11 months against the dollar and traded down 0.3 percent at $1.3204 at 4:34 p.m. Frankfurt time. The Stoxx Europe 600 Index climbed 0.9 percent, and the Standard & Poor’s 500 Index (SPX) surpassed 2,000 for the first time.
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