January 21, 2015
It has been months since the President of ECB Mario Draghi has announced his intention to implement the so-called “quantitative easing”, adopting a similar decision of the US Fed to calm down pressures over the bonds market. So far his intention / decision has been blocked by Germany and Chancellor Merkel, who is reluctant to give the “green light ” and thus alleviate the growing monetary and financial pressure in Eurozone. Now that the single market is faced with deflation, Draghi might feel more decisive and determined to move on. But what about the Greek bonds?
Draghi is ready to resort to quantitative easing and stimulate Eurozone’s economy through the buying of financial assets (e.g. bonds, mortgage loans) that will subsequently lower interest rates. In other words, ECB is planning to print money, create a safety net against market fluctuations, and give incentives for investments and consumption. In similar respect, the soaring of commercial banks from the ECB is expected to motivate them to lend money to businesses and individuals.
Scenario No. 1: Economies like Greece, Spain and Portugal with extremely high debt rates have to be soared with huge amounts from ECB, as the financial assets they provide worth almost nothing – i.e considered as “trash” in the market with low pay-off. Therefore, Draghi’s quantitative easing might be inevitably centered around the buying of state bonds of sound economies such as Germany rather than buying bonds from fragile economies like Spain and Greece. In addition to that, his plan entails the buying of bonds not according to the needs of a given economy (e.g. Greece), but on the basis of the shares each member-state has in the ECB – which is, again, a provision that favors bigger and stronger economies at the expense of smaller and weaker ones. This is one of the major setbacks of Draghi’s plan, a 360 shift from the initial goal (i.e. quantitative easing mainly towards stimulating weak and distorted economies), put forth after the pressure exerted by Germany. If Draghi were to enhance credibility and liquidity of recession-driven economies, then what is the meaning of massively buying German bonds and stimulate an already robust economy, instead of assisting and “sheltering” weaker economies like Greece or Spain that face mounting burdens when it comes to market borrowing, investments or production struggles?
Scenario No.2: Given that Greece is one step before possibly the most crucial national elections, ECB and its President should be firm in their neutral stance over political developments and invest on the common gains and the necessary stability in Eurozone. In this scenario, Draghi will include Greek bonds in quantitative easing and stimulate state’s finance with around 15-16 billion euro, which represents almost 3% of the overall amount that ECB is planning to lend in Eurozone. In this respect, Greece might be pushed to sign a new memorandum and be included in a revisited consolidation program, as the country’s financial performance has not been yet evaluated by the troika. This development might entail new austerity measures and an even tighter supervision by its lenders.
Above all, Eurozone vies for stability. But this stability needs to be accompanied with specific growth plans and investment incentives prepared and executed by the European Investment Bank. In addition to that, we also await for Junker’s stimulus plan that has been so far stuck in “good intentions” rather than specific policy action.Dimitris Rapidis
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