What To Expect From The ECB
Nothing
Draghi must not do anything what Germany does not approve and right now they have no interest to change anything (destroying all but German industry is quite an achievement)
Upbeat ECB ready to start printing money next week
The European Central Bank said it will start printing money to buy bonds next Monday and delivered a robust economic outlook that will make it hard to extend the plan beyond its envisaged Sept. 2016 end-date.
The ECB is embarking on the program of quantitative easing (QE) with a view to raising euro zone inflation from below zero back toward its goal of just under 2 percent, and to helping buoy economies across the 19-country bloc.
The ECB, which left interest rates on hold at record lows just above zero at its meeting off-base in Cyprus on Thursday, lifted its growth forecast to 1.5 percent for this year, from the 1.0 percent it predicted in December.
ECB staff foresaw euro zone inflation rising from 0 percent this year to 1.8 percent in 2017, which would put it in line with the bank's target of close to but below 2 percent.
"If these very bullish forecasts are met, there certainly won't be more QE after September 2016," said Berenberg bank economist Christian Schulz. "In fact, they might then start discussing normalizing policy rates at some point."
But the bank still has a long way to go to convince markets its plans will be effective. Only half of the economists polled by Reuters think bond buying will help inflation rise toward the target and half think the purchases will be extended.
The euro zone's central bank has said it will buy 60 billion euros a month until Sept. 2016 or until inflation is pushed backed toward a target of close to but below 2 percent.
Economists and investors have questioned whether the ECB could accelerate or extend its bond buying should inflation fail to return from below zero to its target.
An analysis of Reuters polls shows more than half the euro zone's most important reports on economic data since the start of the year have beaten the consensus forecast. Many have topped the highest prediction.
Germany, Europe's largest economy, has led the way.
"Looking ahead, we expect the economic recovery to broaden and strengthen gradually," ECB President Draghi told a news conference.
There are tentative signs that inflation, now running at -0.3 percent, has bottomed out.
The February reading was above forecasts, oil prices have rebounded from January lows, growth is picking up and the euro hit an 11-year low against the dollar on Thursday, boosting prospects for higher imported inflation.
"The risks surrounding the economic outlook for the euro area remain on the downside but have diminished following recent monetary policy decisions and the fall in oil prices," Draghi said, firming up his language from the ECB's Jan. 22 meeting.
Draghi is expecting the inflation to raise from -0.3% to 1.5% in the next year. Now that they have official name for money printing he hopes that it will change anything (as if they did not do that till now and laundered the whole thing through Luxemburg - for what Juncker was awarded the President of the European Commission position - criminals awarding criminals).
No changes. ECB is a laughing stuff and that is obvious for quite some time - from the time when Trichet was signaling what will he say on a press conference with the color of his necktie.
Varoufakis Says QE Bound to Fail, Padoan Calls It Success
Greek and Italian finance ministers expressed opposing views on the effectiveness of the European Central Bank’s quantitative-easing program with Greece’s Yanis Varoufakis urging an alternative plan to stimulate Europe’s economy.
Varoufakis said ECB President Mario Draghi’s 1.1 trillion-euro ($1.2 trillion) QE would fail to drive investment-led growth, just as his Italian counterpart, Pier Carlo Padoan, hailed the program as already being successful through a declining euro. Padoan said a weaker euro is in line with the single currency area’s long-term economic outlook and will boost Italy’s recovery this year.
While Greece is involved in negotiations with its European Union partners amid concerns the country could run out of cash at any moment, Varoufakis suggested an “alternative” stimulus plan that entails issuing bonds linked to investment projects financed by the European Investment Bank. Both finance ministers spoke on Saturday at the Ambrosetti economic symposium in Cernobbio, Italy, where ECB Governing Council Ignazio Visco also took the floor.
“QE could prove both unsustainable and incapable of boosting private credit growth and investment in productive activities,” Varoufakis said. “Imagine an alternative plan to QE where the EIB will take its marching orders to lead an investment-led recovery for Europe. I’d like to call that the Merkel plan.”
ECB Draghi: Indicators suggest sustained recovery taking hold
Have not yet converged enough to dispel doubts about cohesion
He adds:
- Nascent recovery offers window of opportunities for reform
- euro area economies have integrated too much to even entertain reversing the process.
- An extremely accommodative monetary policy is not a disincentive for countries to continue with reforms
- calls for quantum leap and institutional convergence
- euro area needs structural and governance reforms
- Most indicators suggest a sustained recovery is taking hold.
- Confidence among firms and consumers is rising.
- Growth forecasts have been revised upwards.
- bank lending is improving on both the demand and supply sides.
- the terms of trade gains for firms and households arising from falling oil prices
- monetary policy measures taken by the ECB since the middle of last year, which have led to a significant easing of financing conditions and protected the euro area from second round effects from this oil price drop, thus amplifying its benefits
- the successful structural reforms that have been implemented in several countries in recent years, which are now starting to produce results.
Says economy has improved because:
ECB's QE Fails to Stop Decline in February's High Yield Issuance: Moody's
High-yield issuance volumes hit $6 billion in February, a decline from the record $16 billion in January, and $11 billion in February 2014, Moody's Investors Service said in the March edition of its "High Yield Interest - European Edition" publication.
The decline occurred as larger M&A-driven activity subsided, despite the announcement of quantitative easing in Europe, as pointed out in the publication.
"Although high-yield markets have seen renewed capital inflows that improve market liquidity, capital inflows did not translate into increased primary activity in February," says Peter Firth, Moody's Associate Managing Director.
"However, the pipeline for mid-March has begun to fill with a number of sizeable refinancing-driven deals," added Mr Firth.
Moreover, Moody's downgraded 16 Russian corporates following the sovereign action, causing the downgrade-to-upgrade ratio to increase again in the region.
The February increase in the ratio came in the wake of a large number of negative rating actions on Russian corporates.
As the report also revealed, issuance remains firmly at the B2 and higher rated level, with no lower-rated issuers accessing the markets in February.
"Investors continue to discriminate for credit quality and raise concerns about the most aggressive deal terms. The challenge for concerned investors lies, however, with the QE-fuelled spread compression and improving market liquidity, which could lead to deals with weaker credit profiles and weaker covenants still being completed," it concluded.
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The ECB meets tomorrow. We do not attribute any significance to the fact that the meeting will be held in Cyprus. A couple times a year, the ECB meets outside of Frankfurt.
There are three key elements of tomorrow's meeting, none of which entail a change in policy. The ECB will provide some more details of its stepped up asset purchases plan that is expected to kick off as early as next week. The ECB staff will provide new inflation and growth forecasts. Even if not in Draghi's opening statement, we expect reporters will likely seek some insight into Greek developments.
There are many technical and logistic challenges to the execution of the ECB's new asset purchase scheme. The national central banks will be doing the bulk of the purchasing and the risk for most of the purchases will not be pooled. It is not clear whether the ECB or the national central banks will lend the bonds that are purchased back to the market, or the terms if it does. It is not yet clear precisely how the bonds will be purchased. The Federal Reserve did so through reverse auctions, but the Eurosystem appears to be more inclined to go directly to the trading platforms and market makers. However, the technical and logistic challenges seem to be modest compared to the operational risks.
The operational risks are two-fold. First, the amount of sovereign bonds that it plans on buying may exceed net debt issuance for some countries, including Germany. This will displace existing investors. We suspect may types of investors will be reluctant to sell their sovereign bonds to the ECB. Banks, insurers, and pension funds are unlikely to be eager sellers. They will find it hard to replace the yields and incur tax event. Moreover, there has been regulatory pressure that has encouraged these investors to buy sovereign bonds.
In the US experience, foreign banks appeared to have sold more Treasuries and Agencies to the Federal Reserve. If this experience is repeated, it would imply non-EMU owners could be the featured sellers. However, ex-EMU ownership appears to be concentrated in the core eurozone bonds (e.g. German and French) rather than the periphery (e.g. Spain, Italy and Portugal). One group of investors that we would peg as more likely sellers of EMU bonds to the ECB would be foreign central banks. With negative yields and a depreciating euro, there already seems to be a move underway to unwind some of the diversification into the single currency.
A second operational challenge will be in the reporting of the purchases. If it is done on a weekly basis, like the Securities Market Program (SMP) it may be easier for the market to game, especially if the 60 bln euros a month of purchases is a formal objective. This would allow investors to mark up the price of the bonds they sell to the Eurosystem.
Look at what is happening with the covered bonds that ECB has been buying since October. It has accumulated about 51 bln euros or almost an eighth of the entire market, according to some estimates. Bloomberg data suggests 21 covered bond issues have negative yields that involve more than 21 bln euros of securities. There are another 10 bln euros of covered bonds that yield less than 2 bp.
For all practical purposes, eurozone bonds are already at record low yields. Germany and Finland Finland recently sold 5-year bonds with negative yields. Austria, which is facing deteriorating financial situation that might snarl even senior creditors, sold a 4-year bond with negative yields. Ireland's 10-year bond is trading comfortably with a yield below 1%.
The US experience warns of the risk that "buy the rumor, sell the fact" type of activity. US yields typically fell in anticipation of the Fed's purchases and would rise as the program got under way. This would seem especially true if one expects growth and inflation to improve. Ironically, this seems to be the case prior to the launch of the sovereign bond buying program.
This will likely be reflected in the ECB staff's new forecasts. Draghi admitted in December that the staff forecasts did not fully take into account the latest drop in oil prices. Since December, the price of brent is little changed net-net. However, it is still off by about 25% since OPEC's decision in late November not to cut back on output. The staff may shave its inflation forecasts which were set at 0.7% this year and 1.3% next year.
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