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Another critical week for the euro? PDF Print E-mail
News - Latest
Wednesday, 12 September 2012 11:13

How has Mario Draghi's announcement of the ECB's plans for further bond-buying gone down? We ask the experts

Ted Scott, director, global strategy, F&C said: "The success of the programme, like other policies implemented by the ECB or other members of the Troika, will ultimately depend on whether growth recovers and debt levels can be contained or reduced. In this respect, the new strategy buys time and will enable the member states to fund themselves more effectively.

“But, with a slowing global economy and uncompetitive exchange rate, it will not contribute to higher GDP or lower debt ratios. For that to occur a more fundamental change in strategy is needed which is something the politicians have to decide upon.

“As we have said throughout this crisis, the outcome is likely to be in the form of a full fiscal and political union as well as a common currency, or there will be a partial break-up. Either of these scenarios is consistent with Draghi's view that the euro is irreversible but the way of achieving a stable and sustainable solution will require more fundamental policy decisions than what the ECB [has] delivered."

Glenn Uniacke, senior dealer at Moneycorp, said: "In revealing the bond-buying programme, Draghi has introduced a safe guard to cut the borrowing costs of debt-burdened eurozone members, but this is only a short-term patch to the enduring crisis.

"Draghi claimed that the ECB will do 'whatever it takes' to save the euro, but his actions suggest that he might be happier leaving the harder decisions to the eurozone politicians. Promises to sterilise the bond buying market are a victory for Germany and mean that the actions being taken by the ECB are not as aggressive as the Quantitative Easing programme employed by both the US Fed and Bank of England.

"Quite rightly, Draghi understands that monetary policy alone will not solve the economic problems in Europe, but that it is his responsibility to maintain financial stability as the politicians look for the end solution.
"The initial reactions in the market have been to sell strongly on the euro, however this is likely to calm and level out over the coming days."

Andrew Morris, managing director of Signature, said: “Thursday’s announcement from the ECB was illuminating in a number of ways. It once again showed the ECB as arguably the only purposeful eurozone institution offering effective policies in handling the crisis. But it was also revealing in that the policy was unveiled without the blessing of the German member of the ECB, Jens Wiedmann.

“The announcement itself was undoubtedly positive, and the initial effect on peripheral bond yields, as well as equity markets, has been good.

“Investors do need to bear in mind that this is not quantitative easing, i.e. the eurozone money supply will not be expanded, and instead any bond purchases made by the ECB will be offset elsewhere. Consequently, the economy will not be stimulated in the same way that we have seen in other economies such as the US and UK.

“It is also conditional on the country in question formally applying for bailout assistance and sticking to the conditions attached. Certainly in that light this remains a stop gap rather than a solution, but it does represent progress nonetheless.

By attaching the conditionality, Mario Draghi is maintaining his commitment to not monetize the debt of troubled countries; he is not offering those members an easy way out.

“The absence of German approval offers both positives and negatives. Positive in that it does show that the ECB is not the German Central Bank and rightly so given that the Bundesbank is only one member of the ECB. The negative of course is that Germany holds the eurozone purse strings and the view of Jens Wiedmann is widely held by the German electorate. This view must evolve as the continued pursuit of austerity and deflation is unsurprisingly not working and is merely making matters worse.

“The week ahead is once again an important one. Within the eurozone, the German Constitutional Court is set to give its verdict on the eurozone bailout mechanism and an increasingly eurosceptic Holland is set to go to the polls.

“In the US, the monthly Federal Reserve Meeting takes place. Having seen disappointing jobs numbers last week, Fed Chairman Ben Bernanke would appear to have greater scope for further QE, which in turn should lead to continued support for risk assets.”
                
Tristan Cooper, European sovereign credit analyst at Fidelity Worldwide Investment, said: "Draghi seems to have met market expectations, which is positive given fears of a disappointment. Peripheral bond markets are appropriately rallying in response. The ball is now firmly back in the court of Spain, which must now sign up to a programme of ‘enhanced conditions credit line'.

"Any prevarication would lead to a big sell-off, which Rajoy can ill-afford. Then the spotlight moves to Italy, which will find it very difficult to stay out of programme if Spain goes in.

"Draghi's comments were marginally negative for Portugal and Ireland. Much of the recent buying in those markets has been premised on the ECB stepping in in the short term. However, Draghi stated that ECB support would only be forthcoming at the time when bond market reaccess was envisaged under their existing Troika programs, which is next year for both. On balance, though, positive for peripheral Europe."

 

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