It’s another D-day for the euro, as ECB Governor Mario Draghi lived up to market expectations and unveiled a massive quantitative easing program. Here are the important things you need to remember from this announcement.
1. Asset purchases of 60 billion EUR per month
First and foremost, let’s marvel at the sheer size and scale of the program. Draghi declared that, starting March this year until September 2016, the ECB would conduct asset purchases of 60 billion EUR each month comprising government debt and private debt. That amounts to more than 1.1 trillion EUR in extra liquidity being pumped into the market. Talk about makin’ it rain!
And that’s not all… This quantitative easing program will be combined with an existing targeted LTRO that involves buying private debt and channeling hundreds of billions of euros in cheap loans to banks. That’s on top of the two rounds of rate cuts announced by the ECB late last year.
2. ECB will take only 20% of the risk
The amount of stimulus being doled out by the ECB suggests that Draghi and his men are dead serious about warding off deflation and boosting economic growth, but what’s interesting to note about their QE plans is that the ECB will only be taking on 20% of the risk while the bulk of the purchases will be shouldered by the central banks of each member nation. So in the event that a particular euro zone government defaults on its debt, the central banks of the member nations will suffer the brunt of the losses!
In addition, these national central banks will have to buy bonds in proportion to its “capital key”, which means that larger and richer euro zone countries such as Germany will be conducting larger purchases compared to smaller member nations.
3. QE decision met with plenty of opposition
As you’ve probably guessed, a lot of euro zone officials were displeased about the announcement and it’s no wonder that German Chancellor Angela Merkel is leading the opposition. After all, the German economy seems to be faring pretty well on its own and it seems unfair that this would force them to have a bigger burden compared to smaller euro zone nations.
According to former ECB policymaker Athanasios Orphanides, it would be counterproductive to shift these monetary policy risks to national central banks instead of promoting solidarity. He even added that this could wind up leading to the break-up of the euro region.
4. Euro zone governments still need structural reforms
In response to critics of the ECB’s QE program, Draghi reiterated that structural reforms among euro zone governments are needed to ensure that the stimulus plan would translate to economic progress. After all, the ECB seems to have used up all the monetary policy tools in its arsenal and may need to rely on more support from national governments.
“It’s now up to the governments to implement these structural reforms,” Draghi explained. “The more they do, the more effective will be our monetary policy.”
5. More downside for the euro?
Even though most forex market watchers had already been expecting some form of quantitative easing from the ECB this week, the actual announcement still resulted to a bloodbath for the euro. The shared currency plummeted against all its major counterparts, with EUR/USD crashing below the 1.1400 mark and EUR/JPY tumbling below 135.00.
For now, the euro’s depreciation might actually be good for inflation, which suggests that the ECB would welcome further declines. However, should debt problems start popping up again, euro zone nations could be in big trouble and the existence of the euro might be once again put into question.
Were you able to catch the euro move during the ECB announcement? Or were you already short on the euro beforehand? Don’t be shy to share your trade ideas and experiences in our comments section!