The central bank is in effect holding the fort through the worst of the crisis and shielding vulnerable states from markets until late 2021.
By Amrose Evans Pritchard of The Daily Telegraph.
The European Central Bank has stepped up pandemic emergency stimulus by another €500bn to counter a double-dip recession, but stopped short of ‘shock-and-awe’ measures to reverse a corrosive slide into deflation.
Bond purchases will be stretched out to 2022, clearing the way for the ECB to mop up three quarters of all fresh debt issuance by eurozone governments next year. This further obliterates the line between fiscal and monetary policy, and pushes the ECB’s balance sheet beyond 70pc of GDP.
The central bank is in effect holding the fort through the worst of the pandemic and shielding vulnerable states from the markets until the EU’s €750 Recovery Funds starts to feed through in late 2021.
The package of measures amounts to Japanese-style ‘yield control’, sending a message to markets that the ECB will hold down long-term interest rates across the board and for the foreseeable future, regardless of underlying credit worthiness or moral hazard.
The policy was signalled weeks ago and has set off a speculative ‘convergence play’ as funds rush to buy southern European debt and reap quick gains on capital appreciation.
“The ECB is telling us that their job is to keep borrowing costs as low as possible and these bonds are an absolutely safe investment. We’ve never had that kind of explicit message before,” said Marchel Alexandrovich from Jefferies.
Yields on 10-year Spanish bonds touched zero for the first time on Thursday. Italian bonds were trading at negative yields on maturities out to five years, even though Italy’s debt has rocketed to nosebleed levels of 161pc of GDP this year and the country is implicitly insolvent.
Professor Moritz Kraemer from Frankfurt’s Goethe University said the ECB has already pushed QE long past the point of diminishing returns and that further purchases will gain little economic traction. “Its strategy has stopped stimulating credit and demand. The only thing that it is achieving now is pushing yields even lower and blowing bubbles,” he said…
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