ROME – “Too late,” they just said skeptics and opponents, mostly Germans: “Interest rates are already low.” “Better late than never” have argued that quantitative easing as the clamor for years, especially the Anglo-Saxon: “The European economy needs a boost, even psychological.” But the Qe is not just words, are 1.14 trillion euro already sure, that could be many more, because Draghi said there will only stop with inflation in view of 2%. The fall in Europe deflation has made possible a historic breakthrough, revolutionary, that projects the ECB on a hitherto prohibited.
explosive stuff. Quantitative easing means quantitative easing of monetary policy, achieved not by reducing interest rates, which are already at zero, but increasing the amount of money in circulation. Translated into simple terms, it soon becomes clear that it is explosive stuff, trampling convictions grown, e specially in Germany, for decades. The Qe launched yesterday in fact means printing money to buy bonds and debts of countries straindebitati. And ‘the equivalent of the fleece of gold and silver coins in the monarchies of the past or the printing of paper money in more recent times. Now money is electronic, a transfer over the Internet, but the result is the same. The theory says it will restart prices and inflation. The paradox is that this may not work.
The first link. With the newly created money, the ECB and national central banks rastrelleranno on the secondary market – that is, banks, pension funds, insurance companies, investment funds – stocks, especially state, because this is the most common title in Europe. Start Here the chain of positive effects that it expects Draghi. The first is the strengthening of the public finances of the weakest countries that will see reduced interest on their bonds, thanks to the new dem and, and fading fears of speculative attacks, since there is the ECB with its firepower in the field . But the roundup of government securities also pushes the funds and insurance companies that sold them to buy other securities, stocks or bonds, driving up those prices and also generating a scent of “wealth effect”.
The American lesson. It does not end here: the rise in prices of public and private securities set in motion by Qe makes those securities less attractive on the international market. Investors prefer to take their money elsewhere. So, sell euro to buy other currencies. The euro will depreciate, but a euro less expensive favors exports. The combined result of ‘”wealth effect” and exports more lively is a stimulus that should revive the economy, stop the fall in prices and restart a bit’ of inflation. This theory says. Not necessarily work. Between Qe in European and American there is an important difference, which concerns the mechanisms of credit. In the US, companies are financed 20% through banks and 80% on the market, issuing stocks and bonds. The Fed could fuel the activities of the industries buying directly their titles. In Europe, the proportion is reversed. The companies are financing to 80% through the banks and only 20% directly on the market. The result is that a revival of investment activity and has to go through the choices of banks still reluctant to broaden the links of the credit. The Qe can break here, in front of the reluctance of banks.
Benefits for banks. However, the same Qe provides lenders exceptionally favorable conditions. Buying in bulk bonds, Draghi demobilizes portfolios of questionable soundness in the coffers of the banks, for example Italian. At the same time, driving up prices in general of all titles, the Qe drives up the value of the reserves and collateral, increasing the share of resources that banks can lend freely. Many think that the Qe would have been much more effective than one or two years ago, when interest rates were higher and the offensive of the ECB, in addition to the effects on the market of the securities described above, would also reduce the cost of borrowing. Today, interest rates are near zero, although margins reduction in rates actually charged to businesses and households, there are still. However, what is close to zero is the nominal rate. Add the general fall in prices and a loan with a nominal rate of 1%, if there is a 1 percent deflation has a real cost of 2%. If Qe drives up prices, everything is reversed. A loan with an interest of 1% and 1% inflation has real cost zero.
Whatever it . This whole chain of effects had been largely anticipated by market participants, as seen from the spreads and quotes the euro, already dropped to the lowest in many years. Not disappointing expectations, Draghi has avoided dangerous retaliation markets. From March onwards, when the Qe is operational, will become decisive new operational expectations shaped by the choices made yesterday. Two are central. The magnitude of the interventions, for at least 1.14 trillion which is higher than expected, but, above all, does not have a roof. Why, said Draghi, the Qe continue until European inflation will not be back on the trajectory of 2%. And ‘the most important step, which the IMF had explicitly asked the ECB: notices require a commitment to markets and equity, without conditions and deadlines, to say that the Qe no going back until it has reached the’ goal. An updated edition of that “whatever the cost” that, two years ag o, saved the euro.
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