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ECB Launches QE-Remix Bond-Buying Program

ECB Quantitative Easing
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The European Central Bank has officially announced a bond-buying program in a bid to spur the continent’s struggling economy to growth. The program is similar to the US quantitative easing program in essence, but is saddled with the complexities of the 19-member state Euro and the difficulties of member states like Greece.

After opening the conference with an uneasy joke, Mr. Draghi outlined the ECB governing board’s decision about the recovery program, describing it under the following terms, “Under this expanded programme the combined monthly purchases of public and private sector securities will amount to 60 billion euros.”

The move brings to an end rampant speculation about the reality, size, and terms of the ECB recovery efforts. The bank said that the program will continue until the start of October 2016.

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Bond markets move under QE strain

European bond yields are expected to move lower once the bond-buying program sets in, and the path they’re expected to follow is the same as that taken by bonds in the wake of the US QE program. The ECB program is more complex however, and the difference mean that the results may not be predictably the same.

The specific terms of the program were not immediately clear after the ECB press conference, but it was stated that the central bank plans on buying the debt of distressed nations like Greece,  but only if conditions were met.

Bond markets have been tumultuously moving on rumors of an ECB QE program up until today. A certain amount of movement in the same direction may be expected on the disappearance of risks, but the medium and long term implications are not easy to model, and predictions are wildly scattered.

Eurozone spinning

Despite the “priced-in” nature of the Eurozone QE program, very little of the market movements appear likely to spark real recovery. Inflation in the single-currency bloc was most recently recorded at -0.2 percent, a number that recalls Japan’s economic stagnation. That disease was, according to the usual analysis, sparked by a deflationary crisis.

The European Central Bank is greatly extending its economic reach with the QE package, but a recent court decision supports its ability to make interventionist asset purchases to stabilize the currency. According to today’s announcement the program will be subject to risk sharing, meaning that at least some of the losses will fall on national central banks were the policy to go wrong.

European yields are already at historic lows, and it driving them  below zero en masse would be unprecedented, though there are some examples of individual cases. At the same time, the Euro has touched lows not seen in more than a decade against world currencies. It’s not clear how much more of an effect the program could have.

The Eurozone economy is more difficult to predict than that of the United States, and therefore more risky to bet on. This weekend a Greek election could result in a government of hard leftists being elected, a move that could overshadow the ECB announcement on the bond markets, at least in the short term.

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Paul Shea

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