The euro's effective exchange rate is down 10% in the past six months and while some fear that the new quantitative easing (QE) program that was announced by Mario Draghi, ECB president, on Thursday could provoke a currency war, the improved exchange rate will not spur an exports boom but along with other short-term benefits, it will help.
Total Eurozone debt exceeds €9tn and the program announced yesterday will enable purchases of about €1.1tn but Draghi used a form of words that suggests it could be extended.
National central banks can hold up to 25% of each bond issue and up to 33% from a single issuer.
The chart above which comes from a research note issued by Torsten Slok, a Deutsche Bank economist, shows a breakdown of the ownership of sovereign debt in the Eurozone at end December 2013.
Greece holds a general election on Sunday and the leftist Syriza party is expected to become the biggest with a very good chance of taking power. Alexis Tsipras, Syriza leader, has called for a European debt conference to restructure the debt which amounts to about 177% of GDP.
Countries that have received troika bailout loans such as Greece, Portugal and Ireland, have a larger proportion of their debt held by foreign institutions like the IMF, the European Union's stability fund, or governments.
“Sub-investment grade countries will be included, as we suspected,” Slok said in a research note. “These countries must be under a program.”
“This, in our view, is a clever design,” he added. “The 33% issuer limit means the ECB cannot purchase Greek bonds before July...the technical limit, which holds for all countries, prevents the ECB from being accused of making a political decision ahead of the election.”
The Financial Times dismisses fears of hyperinflation and adds: "To escape years of enervating weakness the eurozone needs not just a shot in the arm but a long course of treatment. This must include structural reform, not only of the sclerotic labour markets of France and Italy but also of Germany’s product markets, which is as overdue as QE. Neither the markets nor his critics think Mr Draghi has the tools to finish this job. To help prove them wrong, EU governments will need to show as much resolve as he has."
Gavyn Davies, the economist and FT blogger, added:
In many respects, the situation is reminiscent of that in the UK and the US in 2013, when growth rates unexpectedly began to rise, confounding the pessimists.
But there is one crucial difference. The absence of structural reforms in labour and product markets has taken the underlying trend growth rate in the Eurozone to below 1%, less that half that in the US. It is not clear why Keynesian critics of Germany are so reluctant to recognise that structural reforms and monetary accommodation are not mutually exclusive. In fact, they should reinforce one another, as Mr Draghi emphasised again today."
This week the IMF cut its global forecast for 2015 despite cheaper oil and faster US growth; China's growth in 2014 fell to a 24-year low; and at the World Economic Forum in Davos, Switzerland, Li Keqiang, China's premier, referred to China’s "new normal" of slower, yet more sustainable growth.
Li told his audience in Davos:
[China's economic development] is in a critical stage where its path upward is particularly steep,” “In the latter half of the year and beyond, we will further accelerate the transformation of the development model, push forward structural readjustment through structural reform… we will be able to maintain a medium-high growth rate, move toward medium-high level of development, create more value and upgrade the Chinese economy.”
The FT says China announced that its trade with the rest of the world grew only 3.4% over 2014, undershooting a national target of 7.5% for a third consecutive year.
Nils Andersen, head of Denmark's AP Møller-Maersk, which carries 15% of seaborne trade, said that there is a trend of western European companies moving production to eastern Europe from Asia and US companies were investing either at home or in Mexico.
The World Bank said last week that although in 2010 "global trade rose 13%, it has been relatively subdued in recent years, averaging 3.4% annual growth rate between 2012 and 2014. This rate is well below the pre-boom average growth of about 7% per annum. If global trade had continued to expand in accordance with the historical trend, it would have been some 20% above its actual level in 2014" - page 169 here [pdf].
QE will give a shot in the arm to the Eurozone but pre-2008 is not coming back.
Property and QE
The Wall Street Journal reports that Cushman & Wakefield, the international property real estate firm , is now projecting that, with quantitative easing, European sales volume in 2015 would hit €268bn, which would tie the record year, 2007.
David Hutchings, head of Europe investment strategy, said that quantitative easing would help commercial real estate sales partly because, as the ECB buys bonds, investors who would typically buy these bonds are going to be displaced. They’ll look around for other investments and real estate will be particularly attractive because it offers higher yields than bonds.
Dr John McCartney, economist and director of research at Savills Ireland commented: “The programme announced today will put further downward pressure on bond yields, forcing investors into higher yielding asset classes, including commercial property.”
He continued: “2014 was a record year for commercial property investment, with €4.4bn of direct property assets traded. The bond buying programme announced today will continue to drive further activity in this market throughout 2015.”
In addition to lower interest rates, McCartney said that the ECB initiative should also lead to a continuing weakness of the euro relative to sterling.
“In our experience UK buyers were more active in the Irish residential market in 2014, particularly in the higher price brackets. With a further weakening of the Euro in prospect, we would expect continued strong interest from UK buyers this year”.
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