ECB decision in a nutshell
21st March 2016
Here is what you need to know about last week’s ECB decision…short and sweet.
Shift in focus: A shift from the previous currency depreciation policy to create export jobs…to a focus now on enticing banks to lend money…to extend credit.
Purpose: To entice consumers to consume, and corporations to invest in plant and equipment and hire new workers.
The ECB will now, in addition to purchasing Euro 80 billion of Euro government bonds per month, do the following:
1. Purchase Euro-denominated Investment Grade corporate bonds (financial issuers will be excluded).
2. Lend money long-term to banks at 0% or even negative interest rates (conditional LTROs) with the condition or caveat that the banks lend the money to individuals and corporations.
3. Stop weakening the Euro… i.e. no more rate cuts.
Supply of vs. demand for credit is the real issue
Will the ECB’s new venture work? Not sure…the problem is not the supply of credit…but rather the willingness or “demand” from individuals and corporations to borrow money…you can lead a horse to “water”, i.e. liquidity…but you cannot make the horse drink.
Why … consumers and corporate leaders fear the future…. so individual EU countries and their Governments need to implement structural reforms (lower taxes, introduce labour market reforms , create incentives for Research and Development) with the aim of instilling confidence that will motivate both private consumers and corporations to borrow money.
The ECB is passing the baton to the individual European countries.
Can the ECB do more…does it have more tricks up its sleeve?
The ECB may buy EQUITIES in the next downturn or crisis. Did you know that over 80 Central Banks already purchase equities?
The Swiss National Bank and Hong Kong are just two examples.
Did you know that the US Federal Reserve was created in 1912 with the sole purpose to PURCHASE Corporate Bonds…i.e. to provide credit to corporations?
Then the World Wars came and Washington D.C. “persuaded” the Fed to purchase US Government bonds.
Mario has therefore abandoned trying to weaken the Euro as a policy tool (he indicated no more interest rate cuts); his new focus is…providing credit to the real economy.
Implications for investors:
1. The Euro may rise due to one positive fundamental fact: the Eurozone having a positive current account surplus of around Euro 300 billion…Europe exports more than it imports!
Eurozone Current Account Surplus: Buying of EUR 300bn per year
Source: Bloomberg, 14 March 2016.
2. European Investment Grade Bonds will outperform European government bonds, because the ECB will purchase non-financial European-based corporate bonds.
3. Go Global – European Investors need to look beyond Europe to the US and the Emerging Markets to find higher yields.
Disclaimer: This is not a recommendation or solicitation to buy or sell any particular security. Investing involves risk. The value of an investment and the income from it may fall as well as rise and investors might not get back the full amount invested.
Past performance is not a reliable indicator of future results. If the currency in which the past performance is displayed differs from the currency of the country in which the investor resides, then the investor should be aware that due to the exchange rate fluctuations the performance shown may be higher or lower if converted into the investor’s local currency.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer companies at the time of publication. The data used is derived from various sources, and assumed to be correct and reliable, but it has not been independently verified; its accuracy or completeness is not guaranteed, and no liability is assumed for any direct or consequential losses arising from its use, unless caused by gross negligence or wilful misconduct. The conditions of any underlying offer or contract that may have been, or will be, made or concluded, shall prevail.
This is a marketing communication issued by Allianz Global Investors GmbH, www.allianzgi.com, an investment company with limited liability, incorporated in Germany, with its registered office at Bockenheimer Landstrasse 42-44, 60323 Frankfurt/M, registered with the local court Frankfurt/M under HRB 9340, authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (www.bafin.de). The information contained herein is confidential. The duplication, publication, or transmission of the contents, irrespective of the form, is not permitted. 16-1305