An ETF For European QE

15 Jan 2015 | Author: | No comments yet »

An ETF For European QE.

FRANKFURT — A court opinion issued on Wednesday makes it all but certain that the European Central Bank will announce a major round of economic stimulus next week, after months of contentious internal debate.

LONDON: The euro fell below its 1999 launch rate to the dollar for the first time in more than nine years on Wednesday after an adviser to Europe’s highest court said an ECB bond- Investors worried about global growth also pushed the safe-haven yen to a 2-1/2-month high against the common currency and to a one-month high versus the dollar. But much mystery remains about how the bank will deploy quantitative easing — buying government bonds on a large scale to pump money into the economy. The euro hit a nine-year low of $1.1728, down 0.3 percent on the day and below the $1.1747 level at which the single currency first traded on Reuters systems on Jan. 4, 1999. These are the countries often lumped together as part of a northern euro block, such as Holland, Austria and Finland, who prefer a strong euro to a weak one. They must also navigate thorny political issues, like the concerns of Germany, whose opposition to E.C.B. bond-buying has long been the main impediment to action.

The adviser told judges that the OMT bond-buying programme unveiled by the ECB in 2012 but never used did not break EU law, a blow to German critics who argue the ECB has exceeded its mandate by planning to buy bonds. Global investors are giving the south of Europe its wish by selling the euro, but a QE program would be a big help to nations struggling with unsustainable sovereign debts.

It is a moment of truth for the central bank and a test of whether its president, Mario Draghi, can finesse the details while leaving no doubt about his institution’s resolve to reinvigorate the eurozone economy. The World Bank on Tuesday lowered its global growth forecast for both 2015 and 2016 due to disappointing economic prospects in the euro zone, Japan and some major emerging economies that offset the benefit of lower oil prices. Falling oil prices knocked consumer inflation below zero in December, which is generally a good thing for the economy, but in the bizarro world of heavily indebted nations, is a scary prospect. Their position was strengthened by the opinion submitted to the highest European appeals court on Wednesday in response to a lawsuit by German citizens seeking to block a previously planned bond-buying program that Mr.

With even the efficient German economy looking at 1 percent GDP growth in 2015, there is a desire for higher inflation and higher nominal growth rates in Europe. To satisfy the demand, the ECB may try an asset purchase program and it has room to expand its balance sheet: …the central bank can still ease policy by expanding the size of its own balance-sheet, which it intends returning to the high of €3 trillion ($3.7 trillion) that it reached in early 2012. The previous peak occurred as the ECB averted a funding crisis for banks by providing them with €1 trillion in three-year loans in the winter of 2011-12. It has been used by the Federal Reserve in the United States, which began a series of bond-buying programs in the aftermath of the financial crisis that is credited with helping to revive the American economy.

And yet, consumer prices fell at an annual rate of 0.2 percent in December, raising the specter of a downward price spiral that could further undercut wages and growth. But, he said, “We think it’s a two-step move — announcement in January, further details in March.” Some elements of such a program are a given. The drawback to this method is that it would mean buying large quantities of German government bonds, which are already in heavy demand — so much so that on Wednesday the yield on the 10-year German bond reached a new low. A second option would be to buy only highly rated government bonds — those of France, Finland and Germany, say, while avoiding the bonds of governments with riskier finances, like Portugal or Greece.

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