Euro QE Details

January 22, 2015by Hoy Grimm0

Here is a Bloomberg story on the detail of Draghi’s QE:

http://www.bloomberg.com/news/2015-01-22/draghi-commits-ecb-to-trillion-euro-qe-plan-in-deflation-fight.html

Hoy Grimm

The size (70bn us/month) was larger than what was leaked yesterday but the structure is a bit murky. The kneejerk moves was lower for the Euro and higher for Euro stocks.

 

In order to alleviate the reticence of Germany to do QE (to the detriment of their sovereign economy), Draghi is authorizing each member nation to act through their own central bank to enact the bond purchases instead of doing it at the ECB.

 

“The ECB will hold a share of the securities while requiring individual central banks to conduct the bond purchases in the hope that will make nations more responsible for the management of their economies.”

 

The problem with this structure is that German Bunds trade at negative yields out to five years. If they buy their own debt, they are buying bonds that will only create losses for the Bundesbank. Even I can figure out they won’t have much of an appetite for this. France, while not as financially solvent as Germany has a similar rate curve ( the French 10 year is 117 BP lower than the 10 year USTN). That basically leave Draghi relying on the weaker nations like Greece, Spain and Portugal to do QE in Europe.

 

Hope is an awesome plan, Mario

Hoy Grimm

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