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ECB Unveils Details Of Trillion-Euro Stimulus

ECB Unveils Details Of Trillion-Euro Stimulus

05.03.2015 21:47

The European Central Bank has finally set a date for the launch of its massive sovereign bond-buying program aimed at providing cash to the ailing eurozone economy and lifting inflation.

The European Central Bank has finally set a date for the launch of its massive sovereign bond-buying program aimed at providing cash to the ailing eurozone economy and lifting inflation.



Following a meeting of the European Central Bank's rate-setting Governing Council in Cyprus on Thursday, ECB president Mario Draghi said the bank would start buying sovereign bonds from eurozone countries on Monday next week.



"We will on 9 March 2015 start purchasing euro-dominated public sector securities in the secondary market. We will also continue to purchase asset-backed securities and covered bonds which we started last year," Draghi told a news conference in the Cypriot capital Nikosia.



In January, the central bank for the euro currency area unveiled an agressive plan to stimulate the flagging eurozone economy that would involve printing 60 billion euros ($69.7 billion) a month from March this year until September 2016 to finance large-scale purchasing of public and private assets.



The ECB program, also known as quantitative easing (QE), marks the most far-reaching attempt yet by the central bank to prop up the 19-member common currency bloc. In all, the bank intends to spend 1.14 trillion euros over 19 months to spur inflation and encourage lending in the real economy.



"PSPP intended to be carried out until the end of September 2016 and will, in any case, be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2percent over the medium term," Draghi said.



Turning on the ECB's monetary firehose



Under the terms of the ECB's new "public sector purchase programme" (PSPP), the ECB foresees buying eurozone countries' sovereign bonds each month off secondary bond markets.



PSPP is the ECB's version of QE which was previously implemented by the Bank of Japan, Bank of England, and the US Federal Reserve.



When commercial banks or other institutional investors sell large volumes of bonds to the ECB, and receive central bank reserve money (the equivalent of cash) in exchange, those investors have to find some other assets to buy.



The flood of euros will tend to drive up the price of financial assets in general - stocks, bonds, real estate - again in accordance with the principle of supply and demand. Money will flood markets, looking for investments with acceptable risk-adjusted returns.



European stock markets have hit new highs since PSPP was announced. Germany's blue chip stock index, the DAX, for example, jumped to a new high of 11,527 points after Draghi's comments.The euro fell to a fresh 11-year low against the dollar of $1.10.



A lower euro means a mild boost to inflation



Dirk Ehnts, a lecturer in economics at Bard College Berlin, told DW that the flood will also push down the value of the euro, and that means imports of goods and services from outside the eurozone will be more expensive for buyers paying in euros.



Oil, for example, is traded in US dollars - and Europe imports plenty of it. Oil will get a little more expensive in euro terms.



By making imports more expensive, PSPP could provide a modest boost to inflation, which is what the ECB wants.



Deflation is a phenomenon central bankers fear far more than moderate inflation, because people may decide to delay purchases in anticipation of further falling prices. If a lot of people make such decisions, the net result is a self-reinforcing economic slowdown.



PSPP creates room for fiscal stimulus



Ehnts said that another purpose of PSPP may be Draghi's desire to demonstrate that it is possible for the ECB to buy sovereign debt if it chooses to do so, even if Article 123 of the European Union's Lisbon Treaty explicitly prohibits the ECB from funding eurozone governments by direct purchase of sovereign bonds from their primary issuers.



By using a work-around involving buying sovereign bonds from secondary bond markets - after, in some cases, the ECB has lent commercial banks the money to buy government bonds from their primary issuers in the first place.



"Draghi is showing that the ECB isn't really constrained by Article 123," he suggested.







Ehnts also said that some eurozone countries, for example Spain, may at some point abandon 'austerity' as an economic strategy, and decide instead to engage in large-scale debt-financed stimulus spending in an effort to push their national economy out of the trap of high unemployment and consequent low aggregate demand.



"I think Draghi is signaling that the ECB stands ready to support Eurozone governments if they decide to increase their fiscal spending," Ehnts said.







The buying will start as the euro zone shows signs of accelerating growth with major consumption and leading indicators beating forecasts since the ECB unveiled the asset purchase plan.







On Thursday, Draghi said that the ECB's moves would support the emerging data.







The new scheme will build on another stimulus program announced by the ECB last December, under which the bank declared it would buy privately owned asset-backed securities and covered bonds.







 
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