ECB programme is a “game-changer”, say experts

While the eurozone crisis is far from over, the asset-purchasing strategy announced by the ECB yesterday has been met with a great deal of optimism by industry commentators.

By Alexander Paget, Reporter, FE Trustnet
Friday September 07, 2012

ECB president Mario Draghi’s bond-buying programme, which aims to cut the borrowing costs of debt-burdened eurozone members, has been welcomed by economists and given the market a much-needed boost - at the time of writing the FTSE 100 is up 0.21 per cent today, consolidating its 2.1 per cent increase yesterday.

While few experts have gone as far as to say the strategy will put the region on the road to recovery, many believe it has greatly improved the macro backdrop:

Rupert Watson, head of asset allocation at Skandia Investment Group

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"With the crisis spreading and deepening, the ECB has at last found a good reason to intervene more forcefully in a way that it believes is consistent with the treaties that bind it."

"Without the short-dated government bond purchases, maintaining monetary stability would become much more difficult and as a result these purchases are fully justified."

"In a sense, the eurozone's central bank now feels it is able to act like a normal central bank and lead the region's response to the crisis, rather than respond to it. This is enormously significant and could be the beginning of the end of the debt crisis."

"While growth in the problem countries is likely to remain flat or negative for the next few years, we think that the ability of the problem to undermine the global economy or global financial markets is likely to be much diminished."

Ted Scott, director of global strategy at F&C

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While the ECB’s announcement lays the foundation for change, Scott believes this is just the first step on a long road to recovery.

"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."

"In this respect, for that to occur a more fundamental change in strategy is needed, which is something the politicians have to decide upon."

"The way of achieving a stable and sustainable solution will require more fundamental policy decisions than what the ECB delivered yesterday."

Julian Chillingworth, chief investment officer at Rathbones

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Chillingworth believes that more action must be taken for Europe to fully recover.

"Mario Draghi has played a cool poker-hand here, and is keeping his cards close to his chest. Peripheral yields have responded positively, as expected, but confidence remains dependent on whether, or how, structural issues are addressed."

"The bond-buying programme is a positive step, but markets still need evidence that economies are starting to move in the right direction."

"The ECB has done what it does best and talked-up the market, and while all is quieter on the European front, expect investors to turn their attentions to the US."

Scott Thiel, deputy chief investment officer of fixed income at BlackRock

"The ECB’s announcement was – as they say in America – 'everything and a bag of chips' meaning that it effectively delivered everything we were looking for and more."

"As discussed many times, ECB bond purchases cannot be the only response by EU policy makers to the crisis in the EMU."

"However, as a near-term tool, the outright monetary transactions programme (OMT) is a critical and necessary way of lowering volatility so countries have time to make longer-term improvements to their fundamentals."

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Andrew Alexander Sep 10th, 2012 at 02:27 PM

The ECB stated very clearly that new bond purchases would only be made under strict conditions. Those conditions involve:

1. Applying for a bailout from the EFSF
2. Meeting fiscal budget requirements
3. Implementing major spending cuts and various other austerity measures

If this list sounds rather familiar, it’s the exact formula the ECB has used on Greece with absolutely abysmal results. And now the ECB is going to apply this failed approach to the EU as a whole?

Let’s cut through the BS here. The use of the word “conditions” completely negates the word “unlimited.” Saying that you’ll buying “unlimited” bonds as long as EU sovereigns meet certain “conditions” actually means nothing. Greece has received over €200 billion in bailouts under “conditions.” How did that work out?

So the ECB is not actually announcing a massive new bond-buying program. Instead it’s just announced that it’s willing to provide more money as long as EU nations hand over their fiscal sovereignty and implement austerity measures. This is nothing new. In fact, this has been the exact same program that the ECB’s had in place ever since the EU Crisis began in 2010. The fact that it has changed the wording around a bit changes nothing from a fundamental standpoint. Indeed, the program the ECB “announced” is, if anything, the last thing Spain or Italy actually wants.

Spain already has an economy that is bordering on a Greece-like disaster and this is before implementing any real austerity measures of note. So the likelihood that Spain will actually go for any of the ECB’s “conditions” is remote. Indeed, Spanish politicians have shown that they want their funding “unconditional.”

The new ECB program will ultimately prove to be Mario Draghi’s big bluff. By presenting an old, failed program as something “new” and “unlimited” in scope, the ECB has actually shown that it’s essentially out of firepower.

Credit: Phoenix Capital

Tiny Clanger Sep 09th, 2012 at 12:04 PM

"Game changer?" We have three "experts" here who think it's a good idea. Both Spain and Italy have said that they are in no hurry to ask for a full scale bailout with all the attendant austerity measures that that would entail. If this measure reduces their borrowing costs they may not have to but, as far as I can see, it makes no difference to the underlying problems of overspending and unemployment that both countries are facing. Unless they get their financial houses in order it is not going to make any difference. If the markets feel the same way as I do then their borrowing costs are going to go back up to pre-announcement levels. This would force them to apply for a bailout or return us to the situation we were in before this announcement. I think, personally, that "Game changer" is a somewhat over the top (OTT for text-speak readers) description.

Polfers Sep 07th, 2012 at 05:58 PM

Hmmm. A few sayings spring to mind:

1/. you can't make a silk purse out of a Sow's ear

2/. You can fool some of the people some of the time, but not all of the people all of the time.

3/. How many beans make 5?

4/. You can bring a horse to water, but you can't make it Drink

5/. In life, you pay now, or you pay Later.

And my own addition:

It doesn't get easier later. It just gets Later.

You heard it here first.