Mario Draghi's promise to do 'whatever it takes' to save the euro came to fruition today as he led the European Central bank into a historic plan to buy about 1.1 trillion euros of European securities and sovereign debt.
The ECB president said the bank will buy 60 billion euros per month of assets until September 2016 in an effort to head off deflation and revive the stagnant European economy. He left the main refinancing rate and deposit rates unchanged at 0.05 percent and -0.2 percent but reduced the cost of ECB loans to the commercial banking sector. The size of the program is about double what most analysts had expected.
The euro is off more than 200 points against the dollar, trading at 1.1427 at 11:40 am; it’s weakest in 11 years. Other markets had mixed reactions.
Yields on most European 10 year government notes were lower; the U.S. 10 year was flat at 1.87 at 11:30 am in New York. The Dow was about half a percent higher and the Nasdaq and S&P 500 was each up almost 1 percent.
European equites in Germany, France and Spain were more than 1.5 percent higher and the FTSE in London had gained about 1 percent just before its close.
Inflation in the eurozone sank to -0.2 percent on the year in December, the first non-recessionary negative reading in the monetary unions' history. It was the speed of the dip into outright deflation, prices fell 0.5 percent from November to December and are off 1 percent since February, and the prospect of several months at least of declining prices as the more than 50 percent drop in he price of crude oil works through the economy, that may have spurred the ECB to action after two years of discussion.
Economic growth in the EMU slipped to just 0.2 percent in the third quarter and 0.8 percent on the year, and has averaged only 0.17 percent q/q since the 19 nations of the monetary union exited their second recession in five years in the second quarter of 2013.
Unemployment has been static at 11.5 percent for the past five months and is expected to remain there in December. Though it has come down from its 12.0 percent record height, in many of the so-called southern tier nations, like Spain, Italy Greece and Portugal is it considerably higher and young adult joblessness is close to 50 percent.
German protest to the plan has been muted, despite the central bank and government's long standing objections to sovereign asset purchases.
The Federal Reserve initiated its series of quantitative easing programs six years ago and concluded its latest $85 billion a month of purchases last October.
The ECB’s entry into full-fledged easing underlines a difficult split in global monetary policy.
While the world's largest and most influential central bank, the American Federal Reserve is now considering when to increase its main interest rate for the first time in eight years, with most observers expecting an initial hike sometime mid-year, central banks in Canada, Turkey, India, Denmark and Peru have cut rates unexpectedly in the past week.
The Swiss National Bank gave up its attempt to stop franc appreciation, and dropped its 1.20 floor on the euro/swiss last Thursday, causing a rapid 15 percent appreciation in the value of the franc against the dollar and 17 percent versus the euro.
The plan calls for the ECB to hold a share of the securities while national central banks conduct the actual bond purchases.
The ECB is forbidden in its charter from financing the budget deficits of its member nations. The Germans have maintained that any sovereign purchase plan is equivalent to such financing, even if called something else.
Another concern on Mr. Draghi’s mind is undoubtedly the Greek elections in three days. The opposition Syriza party, which has called for renegotiating the terms of the several European bailouts, leads in the polls against the New Democrats of Prime Minister Antonis Samaras.
Syriza leader Alex Tsipras has said the Mediterranean nation should remain within the euro, though his victory could result in the first EMU government explicitly opposed to the bailout austerity imposed by the European Commission, the ECB and the IMF.
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