The European Central Bank announced on Thursday what the markets had been hoping for: A plan to buy unlimited quantities of government bonds.
Even though the ECB’s announcement was widely anticipated on Wednesday following a series of leaks, investors jumped for joy at the news. Among stock market indexes, the S&P 500 surged 1.8 per cent, marking its biggest gain in a month. In Europe, Germany’s DAX index rose 2.8 per cent and the U.K.’s FTSE 100 rose 2.1 per cent.
The bond market also applauded. The yield on Spain’s 10-year government bond fell 39 basis points, putting it below 6 per cent for the first time since May – and down from a high of about 7.5 per cent in July. The yield on Italy’s 10-year government bond fell 20 basis points to 5.3 per cent. (There are 100 basis points in a percentage point.)
However, the ECB held its key interest rate at 0.75 per cent, confounding observers who had been expecting a cut to 0.5 per cent amid economic turmoil. Indeed, the ECB now estimates the euro zone economy will shrink between 0.2 per cent and 0.6 per cent this year. Growth could return next year, but it cut its med-point estimate to 0.5 per cent from 1 per cent as recently as June.
The ECB made it clear that its plan wasn’t the kind of quantitative easing that Americans have come to love. Rather than print money to buy government bonds, the ECB is going to “sterilize” purchases – or sell securities to offset the purchase of new ones. Apparently, the central bank still fears the onset of inflation.
Oh, and before the ECB buys any bonds, governments must ask for financial help from one of the euro zone’s stability funds, surrendering some degree of financial sovereignty and exposing it to a greater degree of fiscal austerity.
Add it up, and is this a solution to the long-running euro zone sovereign-debt crisis? For the answer to that question, we turn to the experts.
Jennifer McKeown, Capital Economics: “The ECB will presumably be delighted by the favourable reaction in the Spanish and Italian bond markets. But its plans do not draw a line under the crisis. ... [The] extra money that it can provide could prove crucial. But the Bank is still not prepared to do governments’ work for them and questions remain over whether those in the periphery and the core are prepared to do what is required of them.”
Benjamin Reitzes, BMO Nesbitt Burns: “The ECB did almost exactly what was expected, and in this case that’s a positive.... Today’s announcement should help contain the crisis, but the weak economic outlook looms, the ECB will need to ease policy further in the months ahead.”
Krishen Rangasamy, National Bank Financial: “This isn’t the Fed or BoE model of unconditional intervention. Still, the bond buying program will help lower borrowing cost for those economies, particularly in the euro periphery, which are currently being punished by financial markets via high interest rates, although the zone still faces massive challenges in enacting necessary structural reforms (something that will take years, not months) to boost competitiveness and ensure the long-term sustainability of the euro project at a time when the recession is deepening.”
Michael Hewson, CMC Markets UK: “Despite market relief that imminent disaster and convertibility risk has been taken off the table by the ECB, it is important to remember that the European economy remains in dire straits, a fact reflected by the ECB downgrading its 2012 and 2012 growth forecasts and Eurozone GDP for Q2 confirmed at –0.2 per cent. “