Fidest – Agenzia giornalistica/press agency

Quotidiano di informazione – Anno 32 n° 302

ECB preview: the devil in the QE detail

Posted by fidest press agency su giovedì, 22 gennaio 2015

merkel angelaBy Andrew Bosomworth Managing Director, Head of PIMCO portfolio management in Germany. When the European Central Bank’s (ECB) Governing Council gathers on 22 January 2015, their discussion will turn to the final touches of “how” to implement quantitative easing (QE), not “if” and “when”. Even Germany’s Chancellor Angela Merkel, speaking at the Deutsche Börse’s New Year reception on Monday night, 19 January, in ECB President Mario Draghi’s presence, signaled her only request was that any ECB policy action must not give eurozone member states the impression that “what needs to be done in the fiscal and competitive spheres could be pushed into the background.”PIMCO’s baseline view is broadly in-line with market expectations (see table below). We think the ECB will implement an expanded asset purchase programme in the amount of €500 to €1,000 billion focused on government bonds, distributed using the ECB’s capital key as guidance and will probably include some form of partial risk sharing.We expect the ECB’s QE to have a similar effect as QE programmes by other central banks, such as the U.S. Federal Reserve, have had in the past. Importantly, the desired impact of QE on the economy will depend on how eurozone governments’ respond. By lowering the cost of financing, QE could help eurozone governments’ efforts to spur growth, for example through growth-enhancing reforms or investment in productive infrastructure. By exchanging newly created reserves for government bonds, QE will compress risk premia on other financial assets, such as mortgages, corporate bonds and stocks, and lower the euro’s external exchange value. Much of these financial effects, however, are already discounted. We think the market’s reaction, therefore, will likely hinge on three inter-related modalities of how QE is designed: risk-sharing, size and distribution. In our view the risk to eurozone taxpayers from large-scale government bond purchases by the ECB are similar to a massive eurobond issued by eurozone member states with several liabilities. Since there is no political consensus among eurozone member states to issue eurobonds, the ECB’s critics claim QE is tantamount to eurobonds via the back door by unelected officials – and therefore wrong.The problem lies in how the ECB might share eventual losses. The typical solution is to distribute such losses over each national central bank (NCB) in accordance with their share of paid-up capital in the ECB. There are three possible options: full, partial or no risk-sharing by each NCB on eventual losses on the bonds purchased under QE. At face-value, the no risk-sharing option might diminish the efficiency of QE because it sends a signal of disunity, i.e., at the zero lower bound, there are limits to what monetary policy in a monetary union can achieve.

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