Skip to content

Mario Draghi was Too Disappointing !

March 5, 2015
What next for EURO“,  I made a downward revision of European currency after hitting my target 1.1250 comfortably to 1.0950. Further, I said that baseline support is at 1.08 and breach of this level would risk test of 1.05.
Today, European Central Bank (ECB) announced launching of Quantitative Easing (QE) from March 9. ECB will start Euro 60 Billion monthly purchase of bond until September 2016, which amounts to Euro 1.14 Trillion and is unlikely to act sooner, unless inflation gets close to its 2 pct target level, which is currently at (0.3 pct Negative).
Interestingly, like all policy makers he too chose to show optimism by making upward revision of this years growth rate to 1.5 pct from 1 pct and by forecasting 2016 growth to jump to 1.9 pct from his earlier call of 1.5 pct.
I do not see any reason for a quick flip in Euro-zone growth rate, except that the recent data (January and February) have shown some improvement. Cheaper oil prices may also help the cause. But this does not guarantee that the growth rate for next two-years will make life easier.Keep a close watch on German economy, which should be the key to region’s future growth.
More importantly, past experience of extremely loose monetary policy does not support the idea that ECB bond purchase will definitely help in stimulating Euro-zone’s economy. Because previously large part of QE money was allocated for Bank Capitalization and substantial amount was used for speculative purpose by banks and financial institutions that saw higher demand for assets.
Draghi in his press appearance should have made firm commitment about the changes in ECB policy stance confirming that good part of money will be allocated to corporate sector. To attain growth and inflation target, he should have said that ECB will encourage funding for real sector growth, but will discourage funds for asset allocation. He should have clearly announced that since growth is priority, there will be no curb on on spending and hence, deficit is now ECB’s secondary issue. Spending with austerity measure does not make any sense.
Another hindering factor that ECB will face after it start its bond purchase is that unless money flows in the right direction, bond yield will quickly reach the ECB targeted floor level of its deposit rate of minus 0.2 pct. This means inappropriate QE funding or no corporate funding will see bond yield plunge to hit the ECB deposit rate, unless banks are willing to expand balance sheets.
ECB will also have to make sure the QE money is not utilized by banks to manage their own books, as cheaper funds makes its attractive and needs to be monitored carefully.
Furthermore, Greece is not an settled issue and it could be the spoiler unless, it is willing to compromise with the terms and condition set by ECB policy makers.
French President Francois Hollande is a good example, as prior to election as President, he was too vocal against ECB policy, but he was quick to reach compromise/adjustment, resulting dip in his popularity.
Therefore, it is testing time for both, Alexis Tsipras the Greek leftist and ECB. Prior to Greece election, Tsipras pledge to roll back austerity and renegotiate mammoth Greek debt.
ECB has already lost it’s 1st round of bout, as it succumbed to Greece’s austerity demand by agreeing to offer 4-month extension of financial rescue. Yesterday, Greece has made its next big move move/stride by tabling Anti-Austerity Bill, which means restoration of electricity connection to its citizen. Families with young children and long-term Unemployed will get job priority and about 300.000 Greeks will get Food Vouchers.
Greece is soon likely to give another open challenge to ECB Unless, it decides throw away Greece from the union, ECB policy makers will be forced to compromise, as it has no other choice.
Therefore, downward pressure is likely to continue, which does not bode well for the European currency. After minor correction Euro will again take the beating and hence, my earlier target remains intact.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: