Irish exporters are set to be the main beneficiaries from the ECB’s planned €1.1bn in quantitative easing.
The euro went into freefall following ECB president Mario Draghi’s announcement yesterday that the bank would buy up to €60bn of public and private debt per month until September 2016.
“This move should in the coming months result in lower borrowing costs for euro area countries, including Ireland, but undoubtedly the most powerful effect will be seen in the euro single currency, which is expected to depreciate substantially,” said Garret Grogan, head of interest rate trading, Bank of Ireland Global Markets.
“Following the announcement, the euro weakened 1.3% versus the dollar to a new 10-year low of $1.14, while the euro is also down against sterling trading at 75.8p. European officials hope this weaker currency will spur exports and foster job creation as the eurozone recovery gains momentum.”
Quantitative easing works by flooding the markets with money in an effort to increase liquidity and lending. The much higher supply of euros weakens it against other currencies, which should make the eurozone more competitive and stoke inflation.
At a press conference in Frankfurt, Mr Draghi said the ECB’s QE programme would stay in operation until “inflation is on a sustained path”. The ECB has a 2% inflation target, although the region is currently in a deflationary environment.
Consequently, if the inflation target has not been reached by September 2016, then the ECB will keep buying €60bn of debt each month until it reaches the 2% level. The breakdown of monthly bond purchases is €50bn of government debt and €10bn of private sector debt. According to these figures, the ECB is in line to buy roughly €16bn of Irish sovereign debt between March 1 and September 2016.
Apart from a much more competitive exchange rate, the other main benefit for the economy will be lower borrowing rates. Government borrowing rates are already at record lows but are expected to move closer to the German rate over the next few months, which is approaching 0%.
Mr Draghi said national central banks will have to shoulder 80% of the losses in the event of a sovereign default. However, market sources say the likelihood of a default is extremely low. Even if a eurozone state gets into difficulty, it can still access the ECB’s outright monetary transaction programme.
However, Finance Minister Michael Noonan has been very critical of making member states responsible for sovereign losses.
At a conference in Dublin on Monday, Mr Noonan said it would lead to market fragmentation and the renationalisation of the financial system. The move was seen as a sop to the German government, which had been lobbying hard against any form of risk-sharing.
Overall, Mr Draghi said QE could not be seen as a form of monetary financing. Rather, it is aimed at restoring confidence and to create the conditions for investment and sustained growth. Moreover, eurozone countries had to proceed with structural reforms of their economies to ensure they became more competitive, he added.
The ECB faced huge resistance from Berlin on QE on the basis it could lead to hyperinflation. However, Mr Draghi said these fears were completely overblown.
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