ECB primes markets for imminent QE

14th January 2015, Comments 0 comments

The European Central Bank on Wednesday prepared financial markets for an imminent programme of sovereign bond purchases, with president Mario Draghi saying the bank had few other options at its disposal to counter the risk of deflation.

A day after ECB executive board member Benoit Coeure had said that the central bank's governing council was in a position to announce such a programme at its first policy meeting of the year next week, Draghi upped the ante still further.

"All members of the ECB's governing council are determined to fulfil our mandate," he told the weekly newspaper Die Zeit, when asked about his plans to launch a controversial programme of large-scale buying of government bonds known as quantitative easing or "QE".

The central bank's mandate is to keep price inflation at just under 2.0 percent, but it fell to a negative 0.2 percent in December, raising fears that the eurozone could fall into a cycle of damaging deflation where falling prices lead to job losses and lower output.

"Of course there are differences about how we can do that. But it's not as if we have an endless amount of possibilities," he said.

The comments will fuel speculation that the ECB's governing council will announce plans for a programme of some form of QE at its meeting on January 22.

Other central banks around the world have used QE programmes to kick-start their economies.

- 'Very far advanced' -

But there are critics of such a programme in Europe, notably the Bundesbank or German central bank, which believes QE will take away the pressure on governments to reform their economies and is effectively a licence to print money to get them out of debt.

Under QE, central banks in effect create money to buy sovereign bonds, and thus government borrowing costs fall, but the objective is for the funds to find their way back into the economy through investment and spending.

Just on Tuesday, ECB executive board member Coeure had said discussions about a QE programme were "very far advanced".

"We had a discussion last week on many of the technical details. We are definitely in a position to make a decision on January 22," when the ECB's policy-setting governing council meets next, Coeure said.

"But that does not mean we will actually make a decision," he added.

- ECJ green light -

A group of euro-sceptics in Germany actually took the ECB to court over an earlier bond-buying programme called Outright Monetary Transactions or OMTs, arguing that such a measure overstepped the central bank's mandate.

Last February, Germany's highest court, the Constitutional Court, voiced doubts about the OMT programme and sent the case to the European Court of Justice.

But the ECJ's Advocate General Pedro Cruz Villalon found that Wednesday that the OMT programme is "in principle" in line with European treaties.

ECB executive board member Yves Mersch said Wednesday he "took note" of Villalon's opinion and said the OMT programme was still "ready and available".

"We have always been of the conviction that OMTs are legally sound and in line with our mandate," Mersch told journalists.

"As in the past, the governing council will always comply with EU law. The end does not justify all means," he added.

The OMT programme was unveiled in August 2012 at the height of the eurozone debt crisis when financial market turmoil looked set to bring down the single currency.

While it has never been put into use, its mere existence has proven to be the most effective weapon against the crisis and has largely defused fears of an imminent break-up of the eurozone.

- 'No legal hurdles' -

Analysts said the ECJ opinion will give added tailwind to Draghi and supporters of QE.

"QE is not controversial from a legal viewpoint. If anyone had any doubts on this issue they should be gone now," said UniCredit analyst Andreas Rees.

Berenberg Bank economist Christian Schulz agreed.

"It means that no additional legal hurdles stand in the way of QE, for which we see a 90 percent chance to be announced at one of the next two meetings," he said.

But Anshu Jain, one of the co-chief executives of Germany's biggest bank Deutsche Bank, said that QE is not the cure-all that its proponents believe it is.

"Our people are fairly sceptical," he said an interview on the N24 news channel.

"It will weaken the euro, which will help Europe, but it's structural reforms that will really help," Jain insisted.


© 2015 AFP

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