The governing council of the European Central Bank meeting in Frankfurt today agreed to launch a quantitative easing (QE) sovereign bond-buying program amounting to €60bn each month - asset-backed securities and covered bonds are also included.
The central bank will continue the program until there was a “sustained adjustment in the path of inflations that is consistent with our aim of achieving inflation of close to 2%”according to Mario Draghi, ECB president.
The ECB also cut the cost of its long-term loans to banks.
Bloomberg said investors reacted by selling the euro and buying European stocks. The currency extended declines as Draghi spoke, weakening 1.2% to $1.1473 at 3:30 p.m. in Frankfurt.
The Euro Stoxx 600 rose 0.93%.
Under pressure from Germany, national central banks will assume most of the responsibility for losses from any default or restructuring of their national debt, in contrast with the tradition set by previous sovereign bond-buying schemes. However, there will be risk-sharing on 20 per cent of the assets, mainly debt issued by European institutions bought by national central banks.
“With regard to sharing of hypothetical losses, purchases of securities of European institutions, which will be 12% of additional purchases, will be subject to loss sharing,” Draghi said. “The ECB will hold 8% of additional asset purchases. That implies that 20% of additional purchases will be subject to a regime of risk sharing.”
There will be a limit of a third of a country’s debt issuance and the maturities of bonds purchased will range between two and 30 years.
Christine Lagarde, managing director of the International Monetary Fund (IMF), said on Thursday that expectations of a bond-buying program in Europe had already had an effect.
Willem Buiter, Citi's chief economist, told CNBC that ECB QE would be a "poor man's monetary policy" and would do little to boost growth in the Eurozone - see video below.
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