Research (Conseq)
Markets  |  September 07, 2012 10:33:06

Comment: ECB launched the purchases of government bonds of member countries

ECB fulfilled the expectations of the market and launched the purchases of government bonds on the secondary market (the so-called Outright Monetary Transactions). Governor Draghi after the meeting of the ECB Governing Council announced the launch of the program to support member countries in EMU. The essence of the program will be the presence of the ECB on the secondary government bond market, where the bank in the event of a significant stress buy bonds with maturities of up to 3 years. The program is not limited in volume. For relevant countries, this aid will be available only if they accept the conditions that the ECB, in cooperation with the IMF. The ECB did not define any specific level of bond yields and margins to the core EMU bonds on which to activate shopping, going purely discretionary decision making under current market conditions. The essential point is partly that the ECB will have seniority over other creditors.Thus, if a country has not been able to meet its future obligations, the Central Bank shall bear any depreciation values ??equally with other investors. An important aspect in terms of the impact on inflation is that all purchases will be sterilized operations knotting liquidity from the banking market. The program therefore does not mean pumping new money into circulation, as in the case of so-called quantitative easing the U.S. Fed.

With this step, the ECB has fulfilled the high expectations that investors put their into it, and created the conditions for resolving protracted fiscal crisis in the eurozone. However, this is only the first step. Solution to work, it must now governments troubled countries (led by Spain) in the log, and affirm a willingness to fulfill certain conditions, which will take the form of consolidation measures in fiscal and economic policies that will lead to stabilization or decline in public debt and increase the competitiveness of these economies. The implementation of these measures, however, will in many cases a set of unpopular measures, which are likely a number of contemporary governments may not survive politically. The result can be a significant redrawing of the political map of Europe and at the same time testing the coherence of the project of European Monetary Union.

Immediate impact on financial markets has been very positive, yields of Spanish and Italian government bonds fell significantly, significant gains was reported equity markets. Whether this trend will continue in the longer term will depend largely on the willingness of first indebted countries to accede to the conditions set by the ECB, then their factual claims. In this regard, it will be crucial whether the euro zone this year after probable moderate economic downturn in the next year can restore at least moderate growth. This would help Europe to better performance of the world's largest economy, the United States and continue growing (albeit more moderate pace) emerging markets.There will in any case not a rush acceleration, success will grow in the order of tenths of a percent.




Ondřej Matuška

Portfolio Manager

Conseq Investment Management, Inc.


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