Since it is especially hard to gauge the impact of this exercise, extending it beyond its stipulated March date may leave it in a vulnerable position, especially since it is running out of options to buy quality debt bonds. The ECB’s policy making body is set to meet this Thursday.
The European Union, has reached a major milestone in its government bond buying program when its cumulative purchases over the last 18 months hit the 1 trillion euros ($1.12 trillion) mark.
It is yet to be seen as to how effective this bond buying program will be especially since its impact on the EU economy will be hard to gauge as there is no clear way to determine how the economy would have been impacted without this exercise.
While inflation is stuck at near zero levels, lending rates by banks have re-bounced. 18 months since the ECB started purchasing state debts, results are mixed at best.
The central’s bank’s policy making body is set to meet this Thursday. Although its President, Mario Draghi, is not expected to make any fresh announcement, there is a hint of a possibility that the asset-buying scheme will be extended beyond its end date of March.
Prolonging the purchases could be challenging since the ECB has already purchased a sizeable chunk and further purchases risks distorting market prices and running out of buying eligible bonds.
Already the ECB has run of eligible bonds in Luxembourg and in Estonia. Meanwhile in Slovakia and in Portugal, it has been acquiring fewer bonds than the rules of its bond buying program dictates.
In the overall bond buying program, France, Germany and Italy were again over-represented, with the volume of purchases slowing down to 50.5 billion euros in August from 69.7 billion in July.
Significantly, Germany’s bonds, with a maturity of up to 10 years, are already trading at a negative yield.
The yields of debt bonds issued by Nestle and Orange have also, currently, yields of less than zero.
According to sources who are familiar with the matter at hand, the ECB could consider raising the limit on its purchase limit of government bonds to ease the program. It could also look at new asset classes.
Sources have further revealed that abandoning the capital key rule, which dictates that the purchases of bonds be proportionate to their respective capital contributions, was seen as the least palatable option since it could leave banks exposed to legal and political challenges.
($1 = 0.8963 euros)
Categories: Economy & Finance, Regulations & Legal, Strategy
manageria.biz 
Leave a comment