Mario Draghi suprises markets with bigger trigger on bond-purchases. Follow … – Telegraph.co.uk

Posted: Thursday, January 22, 2015

15.03 Draghi’s bazooka is “bigger than expected” says Mauro
Vittorangeli at Allianz Global Investors and will be enough to appease
markets for a while at least.

Quote
All eyes were on Mario Draghi and he has delivered a bigger bazooka than
investors were expecting. This will satisfy markets for now and should lead
to further compression on spreads and continue the depreciation of the euro.
The 18 month minimum run for the programme will convince markets of the
ECB’s determination to address the challenges that have been stalking the
Eurozone. Like the Fed before it, the ECB has now proved that it is capable
of tackling serious market challenges.”

14.55 Kathleen Brooks, research director at Forex.com, has figured out
that the ECB is only doing around 200bn of “real QE” – asset
purchases where the risk of default is shared among member states.

Quote
The initial reaction to this announcement is that the ECB has embarked on
full-scale QE, but this is wrong. Full blown QE is when a central bank buys
assets from banks, assuming any potential losses with the knowledge that if
losses mount then they can always print more money to get themselves out of
any trouble. Without full-blown risk-sharing then assets, and risks, sit on
member states’ central bank balance sheets, which don’t have the power to
print money. So, if these assets loose value, then the national central bank
may still have to rely on a sovereign bailout. Thus, this form of QE is not
bailout-proof.

In comparison to Fed or BOJ-style QE, the ECB’s QE programme is actually
only EUR 200 bn over 18 months, as this is the only portion of the purchases
where risks will be shared among member states.

14.51 Draghi’s all done. But analysts are scratching their heads over
how much of the ECB’s stimulus will be new. It was already buying
asset-backed securities and covered bonds under its “QE-lite”
programme and it seems these purchases have been included in the total
figure Draghi gave today.

14.40 Despite the dramatic move in the euro today Draghi says the
exchange rate is not a policy target for the bank

14.36 As the Twittersphere is pointing out, markets are giving the ECB
a standing ovation.

14.34 Read Mario Draghi’s statement
in full here
.

14.33 Draghi is dismissing concerns about mutualising risk.

Quote
Risk sharing is not a fundamental principle of our monetary policy
announcement today, but is fundamental to OMT.

14.29 Draghi: average inflation rate over the next 10 years is 0.9pc.

Quote
There is little doubt that we should act. We believe our actions will help
lift inflation even though some has been priced into the market.

14.23 Draghi says the ECB will be buying bonds with maturities spanning
two to 30 years. He added there was no special rule for Greece and the ECB
could start buying Greek bonds in July.

14.22 Draghi has said countries should not consider the stimulus
programms as an incentive for fiscal expansion (quote h/t to Reuters).

QuoteIt would be a big mistake if countries were to consider that the presence
of this programme might be an incentive to fiscal expansion … So it’s not
directed, certainly, to monetary financing at all. Actually it’s been
designed as to avoid any monetary financing.

14.19 In case you missed them, here are the key points

The European Central Bank will pump up to €60bn (£46bn) a month
into the eurozone.

Purchases will include eurozone sovereign debt of investment
grade bonds.

• “Additional eligibility criteria will be applied in the
case of countries under an EU/IMF adjustment programme,” allowing
purchases of Greek debt.

Programme will begin in March and last until September 2016, or
until a “sustained adjustment” higher in the path of inflation.

The euro dropped nearly 1pc to a 2003 low of $1.1513.

The purchases of nation’s sovereign bonds will be based on the
shares of each country in the ECB’s capital key.

The package is intended to boost euro area economies and combat
falling price growth.

However, economists are divided over whether the ECB has left
it’s move too late and whether quantitative easing will
work
.

14.14 The euro is now tracking even lower. Seems to be because Draghi
is talking about the extent to which the monetary base will expand. The
answer? More than anyone expected.

14.05 Draghi adds ECB won’t buy more than 25% of each country’s debt
issue, and 33% of its total debt to allow actual market pricing.

Draghi says “Some additional eligibility criteria will be applied in the
case of countries under an EU?IMF adjustment programme.”

13.55

13.50 The total bond-buying could be up to 1.1 trillion euros, which is
bigger than most analysts expected. The FTSE is up nearly 0.6pc on the news.

The euro has tanked:

13.40 BREAKING: ECB announces €60bn a month purchases to be conducted
until the end of 2016.

Will only include investment grade debt.

Draghi says 80pc of the debt will be carried out at the risk of national
central banks

13.39 DRAGHI HAS ARRIVED. Wishes everyone a Happy New Year. He’s
wearing a blue tie.

13.35 The
internet is not taking well to the delay

#WhyIsDraghiLate

13.33 Still no sign of Draghi. Could he be watching a live-stream of
Angela Merkel at Davos perhaps?

13.28 The press room in Frankfurt is filling up. You
can watch live here.

13.25

13.20 Today’s press conference will come from the brand spanking new
ECB headquarters, which don’t in fact have enough room for all the bank’s
staff. Bruno Waterfield is there for us:


The brand new ECB building, which has arisen in one Frankfurt’s tougher Ostend
Eastern quarters, is leading to local gentrification as almost 3,000 bankers
move in.

The twisted together 45-storey glass towers, 607 feet tall, next to
Frankfurt’s river Main were three years late, opening last November.

In typical EU fashion the budget for the project was €850 million on the
project. But by the time the building opened its doors the cost had risen to
€1.2 billion.

This all took place at a time when ECB officials were driving through
austerity in eurozone. The cost of each workstation in the new building is
almost €500,000.

Even worse, the towers do not have enough space to house all of the euro’s
central bank’s staff. The crisis has seen the ECB’s role and staffing
balloon.

Up on the 43rd floor, under a glass dome, 500 feet in the air, the ECB’s
governing council meets. As Der Spiegel put it: “It’s the kind of space
that might accommodate a global government in a science fiction film.”

13.17 The delay to the announcement will mean that Chancellor Angela
Merkel may not be faced with as many awkward questions about monetary policy
at Davos today. She’s just about to take the stage now. You can watch below:

13.10

12.51 Mario Dragh-ing it out. All eyes will be on the Italian at his
press conference where, perhaps, we will be hearing about QE (we hope).

12.45 BREAKING: There is no news for now.

“Futher monetary measures are to be announced at 13.30” says the
press release.

Interest rates remain unchanged, but it’s time for lunch I think.
Unsurprisingly, the markets have had zero reaction to the rate hold.

12.40 Bazooka time is five minutes away. Here’a a gratuitous visual
representation of what could happen

12.38 Here’s how the markets are looking with a decision imminent:

FTSE is up 0.4pc

France’s CAC40 is flat for the day

Germany’s Dax down 0.4pc

12.35 Ten minutes…

12.32 In addition to any QE announced today, we’re also getting a rate
decision from the ECB.

The Bank’s current benchmark rate stands at a record low of 0.05pc. They could
well follow their Scandinavian counterparts and cut again moving close to
negative territory. (Sweden: 0pc; Switzerland -0.75pc; Denmark 0.5pc).

12.29 The German Chancellor is in the house (in Davos). She’ll be
addressing delegates in just under an hour.

12.25 They need a new song. See below (you can watch the live webcast here)

12.22 Soundtrack for the day: Quantitative Easing – the song

12.20 The markets reaction to the expected QE has been subdued today,
suggesting much of the anticipated easing has already been priced in.

David Marsh from the Official Monetary and Financial Institutions Forum
(OMFIF) thinks the ECB’s touted plans can already be dubbed “an
all-round disappointment” as the “negative aspects will outweigh
brighter European economic prospects.”

QuoteThe ECB has firmly crossed a fateful line into the world of full-scale
politicisation, the opposite of what its purist proponents wanted.

Europe’s monetary policy-makers are likely to end up spurring high-profile
disappointment among both supporters and denigrators of aggressive easing
policies. Irrespective of the outcome, the euro is likely to decline in
coming weeks as policy disarray, uncertainties after the weekend Greek
election and a groundswell towards negative interest rates across European
bond markets hits buying sentiment for the single currency.”

12.07

12.05 T-minus 40 minutes to the ECB’s announcement. The central bank
will drop a statement before Mario Draghi faces the press at 13.30.

Here’s a recap of the sort of things we could expect:

• €50bn purchases a month starting in March, and concluding
at the end of 2015 or 2016
Plan for national government central banks to purchase
their own debt
A limit to only investment grade bonds – excluding the
likes of Greece

12pm Our economics correspondent Szu Chan is navigating her way through
the inclement weather conditions in Davos…in a snow buggy.

11.50am While most the delegates at Davos will have half an eye on
Frankfurt today, the other half may well be on Prince Andrew.

The Duke of York is due to arrive on the slopes today and make his first
public statement about
“sex abuse” allegations.

11.40am Even the most ardent proponents of monetary stimulus are
readily admitting that the central bank’s actions is not a silver bullet for
the eurozone’s woes.

Speaking at Davos, former US treasury secretary Larry Summers said Europe’s QE
was not likely to be as effective as that carried out by the Federal
Reserve.

QuoteIt is a mistake to suppose that QE is a panacea in Europe or that it will
be sufficient,”
former U.S. Treasury Secretary Larry Summers said
at the World Economic Forum in Davos on Thursday.

“There is every reason to expect that QE will be less impactful in a
context like the present one in Europe than it was in the context of the
United States.”

11.35am Speaking of the Swiss, investors are now paying for the
privilege of holding the country’s short-term debt

11.30am

11.24am The Danish central bank cut interest rates and ventured
further into negative territory earlier this week
. The move was a
bid to deter investors from ploughing into the currency as expected European
quantiative easing was likely to see a sell-of in the single currency.

This followed the move by the SNB to cut Swiss rates to -0.75pc last week
after they abolished their currency ceiling.

So far, the Danish central bank has reaffirmed its committment to maintaining
its currency peg with the euro. The krone trades in a very narrow band to
the single currency, and has operated on a fixed exchange rate policy since
the 1930s.

Elsewhere, in what seems like a race to the bottom for monetary policymakers,
the central banks of Russia and Canada also announced rate cuts yesterday.

11.15am The currency markets are already reacting to a potential QE announcement,
and the Danish krone has fallen to its lowest level against the euro in
nearly five months.

The country’s central bank is now stepping up its intervention after strong
flows into the currency which investors could now see as a safe haven.

The move comes after the Swiss central bank decided to abandon its de facto
currency peg with the single currency. Unlike the franc, Denmark does
operate a more conventional peg with the euro.

“They have been intervening, but today they just started to hike the bids,”
a senior trader at a Nordic Bank told Reuters. “They (the central bank)
started at 7.4345 crowns per euro and pushed it to 7.4430 crowns.”

The krone fell by as much as 0.25 percent its largest single-day percentage
drop in Reuters data series beginning in 1999.

Here’s
why the Danes could be the next country to cause chaos in the currency
markets.

11.05am Our man in Brussels Bruno Waterfield has hot-footed it over to
Frankfurt for today’s announcement. Here’s a summary of the three questions
markets will be asking about the size and scale of the central
bank’s proposals to slay the deflation monster.

Here’s a snippet:

Northern and Nordic eurozone members are concerned that QE will, in the
medium term, take the pressure off France and Italy to implement budget
cuts.

The size of the majority on the ECB’s governing board will be important
amid reports that it is only 13 to eight in favour, which is hardly a
ringing endorsement of the QE measures.

Greece, which is expected to be excluded from the QE measures for now, has
elections on Sunday.

11.02am If you’re still confused on what exactly is involved in the
digital money creation that is QE – here’s
a primer.

11am Another of the much-touted ECB plans is the possibility of only
buying up high-grade sovereign debt. This would include the likes of
Germany, the Netherlands, and France, but exclude peripheral nations – most
notably Greece.

Again, this would be another means through which the central bank could limit
the credit risk it takes on through QE, but may well prove a disappointment
to the markets, and of course Greece. The country’s finance minister urged
the ECB not to exclude it from QE: “No country needs quantitative
easing as much as Greece,” Gikas Hardouvelis told German business daily
Handelsblatt.

10.50am A reminder that whereas the ECB could be stepping in to
unchartered territory today, its counterparts at the Federal Reserve and
Bank of England first rang the starting gun on monetary stimulus at the
height of the crisis.

As
Jeremy Warner points out,
conditions were very different then, as
markets looked to monetary policymakers to stabilise the global financial
system and provide liquidity for a spooked market. Now, the ECB’s bogeyman
is deflation, and it’s not entirely obvious that sovereign bond purchases
will do the trick.

The thing about QE is that it seems to be quite effective when in the midst
of a crisis. By propping up the banks, it prevents the worst consequences of
a credit crunch. But how meaningful is it when trying to further stimulate
demand thereafter?

There is plainly a demand problem in the eurozone, but it is worth pointing
out that core inflation is now lower in the US than in Europe, and not that
far off in Britain. Not much effect from QE there, then.

10.30am If today wasn’t exciting enough for eurozone watchers, German
chancellor Angela Merkel will be taking the stage at Davos at 1.15pm. The
ECB’s announcement will drop at 12.45, with Mario Draghi facing press at
1.30pm. Expect a few awkward questions from the slopes.

The look Mario Draghi is hoping Ms Merkel will be giving him around
2pm today.

10.20am

9.55am Alternatively, here’s a blog by ECB-watcher Lorcan Roche Kelly,
on why national central bank buying could
be the best type of QE of them all.

9.50am One of the more politically acceptable proposals doing the
rounds has been the idea that the ECB will get its 19 member state central
banks to carry out the bond-buying instead.

This, goes the theory, should prevent the mutualisation of risk that the
German board members of the ECB so fear. Having the individual central banks
of France, Italy, Spain and the rest have their government bonds on their
own balance sheet would mean the rest of the eurozone would not be liable
for any potential losses. Or not.

Here’s Ben Wright on why a national
central bank plan is a ‘fudge’ which would deservedly fail.

National central banks in the eurozone, with the notable exception
of the Bundesbank, are not really worthy of the name; they are glorified
think-tanks. It is the ECB that effectively “prints” the money that will be
used to make the asset purchase necessary for quantitative easing (although
how exactly this will happen remains unclear). While the credit risk of
those bonds might sit on the books of the national central banks, that
distinction would quickly be rendered irrelevant in the event of a
disorderly default.”

9.45am Another central bank may be ready to join the QE party says Jim
Reid at Deutsche Bank, but when will it all stop? From his morning note:

QuoteOnce they start it might be incredibly difficult to stop without a
political accident on the negative side or a sustainable exogenous positive
growth shock. If there is no political accident, will they still be buying
bonds into the 2020s? Will they have bought other assets by then or will we
have printed money to give directly to citizens before the next decade
starts?

When QE first started post crisis we felt money printing would be around
for years and years. Several years later and we still can’t see an end in
sight even if the Fed is currently pausing and the SNB has shown that there
is an alternative direction for some. So today likely starts a new chapter,
even a new section of a book that is nowhere near finished.”

9.35am The politics behind any move into sovereign bond-buying from the
ECB have been as intriguing as all the various implications it could have
for Europe’s economy.

Resistance from Germany and other northern member states has acted as one of
the biggest constraints acting on president Mario Draghi.

In a hint to Germany’s intransigence, France’s finance minister Michel Sapin
has said today: “The Germans have taught us to respect the independence
of the ECB. They must remember that themselves.”

Touché.

9.25am

9.20am Today’s possible QE announcement has been one of the most widely
trailed in a long time. There have been an almost interminable number of
leaks doing the rounds in the press in the weeks beforehand.

Here’s a useful summary of what various banks think the size and duration of
the announcement (could) be. Hat-tip to Credit Agricole:

9.10am Here’s the chart that shows just why the eurozone is getting
ready to inject more stimulus into the ailing bloc. Consumer prices shrunk
by 0.2pc in December, and inflation has been undershooting the ECB’s 2pc
mandate since January 2013.

Growth doesn’t look to clever either.

9am In almost uncanny timing, Christine Lagarde, Larry Summers and a
host of others are speaking on the ‘End of the QE Experiment’ at the World
Economic Forum right now.

Have a watch:

8.50am Adam Posen, a former rate-setter at the Bank of England, is
addressing the Davos crowd right now talking about Japan.

Mr Posen was one of the staunchest supporters of QE while at Threadneedle St,
and is now warning Mario Draghi should follow the lead of his counterparts
in Japan by announcing an open-ended bond-buying scheme later today.

Here’s a nice comparison of the extent of Japan’s radical QE experiment
compared to other major central banks.

8.30am An ECB quantitative easing scheme has become the talk of the
town at Davos, Switzerland, where the great and the good are gathered for
the annual World Economic Forum meeting.

Ana Botin of Santander thinks QE “is a good thing, it is very welcome and
we need it”.

Economists Larry Summers says it’s “a mistake to think that ECB QE will
be a panacea”, adding that “we have to recognise that the era when
central bank improvisation can be the world’s growth strategy is coming to
an end”.

Christine Lagarde, head of the IMF, thinks QE has already worked. It has
resulted in a depreciation of the euro exchange rate. The currency has
already lost some strength as investor expectations of stimulus have
increased.

8.20am If you want to watch the conference today, the ECB has put
together a list of live feeds you can use to follow the action.

7.30am It will have been a long night for Mario Draghi, president of
the European Central Bank.

The Italian ex-Goldmanite is now under immense pressure to deliver a potent
package of quantitative easing. Some 93pc of analysts polled by Bloomberg
believe one will be unveiled today.

It is hoped the measures will be announced today, with a sufficient size and
scope to support limping eurozone economies.

The euro
area fell into deflati
on
this December, with prices falling 0.2pc in the year to November, and the
currency bloc’s unemployment rate has remained in the double digits since
2011.

Leaks from the ECB suggest that the
central bank could be poised to begin bond buying at a rate of €50bn a month
,
from March until the end of 2016.

The sum would be more than twice the amount that had been expected by
analysts.

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