Open-ended European QE starts 'with a bang'

Open-ended European QE starts 'with a bang'

Katy Barnato  | @KatyBarnato

http://www.cnbc.com/id/102354830

European Central Bank (ECB) President Mario Draghi announced the launch of an open-ended, expanded monthly 60 billion euro ($70 billion) private and public bond-buying program on Thursday.

The long-anticipated introduction of euro zone government bond purchases, which could amount to as much as a trillion euros, will mean the ECB will join the U.S. Federal Reserve, Bank of England and Bank of Japan in launching a quantitative easing (QE) scheme.

The program will be open-ended, lasting until at least 2016, Draghi told reporters at his regular media conference on Thursday, and will start in March this year. The hope is that it will boost the region's painfully low inflation rate, which came in at an annual minus 0.2 percent in December.

Explaining the ECB's decision, Draghi said: "Inflation dynamics have continued to be weaker than expected. While the sharp fall in oil prices over recent months remains the dominant factor driving current headline inflation, the potential for second-round effects on wage and price-setting has increased and could adversely affect medium-term price developments."

The size of the program was bigger than the 50 billion euro per month rumored prior to Draghi's announcement.

Read More: Live blog: Markets cheer European QE

"European QE is set to start with a bang rather a whimper, a fact that will be well received by investors," said Nancy Curtin, CIO of Close Brothers Asset Management, in a research note after Draghi's announcement.

"The euro zone was in need of shock-and-awe tactics from the ECB to combat the prospect of a prolonged period of deflation, and Draghi has finally delivered on his promise to do 'whatever it takes'."

The ECB will purchase euro-denominated investment-grade securities only. The debt of countries like Greece, which are subject to international bailout programs, will be subject to "additional eligibility criteria," Draghi said.

Debt that is trading with a negative yield will also be eligible for the program. Draghi also said that in the event of a sovereign restructuring or default, public and private bondholders would be treated on equal terms.

Twenty percent of the additional purchases will be subject to risk-sharing arrangements, designed to limit the amount of risk the ECB takes on to its balance books. The majority of risk will remain with euro zone national central banks.

No more than 25 percent of each debt issue will be purchased. The maturities of the debt purchases will range between two and 30 years.

The euro slid against both the sterling and the U.S. dollar after Draghi's announcement. Europe's stock markets staged a small rally on the news of the announcement, while 10-year yields on a range of European sovereign debt fell to record lows.

Earlier in the day, the ECB announced it would hold its main interest rate unchanged. It kept its main refinancing rate at 0.05 percent, with the rate on its marginal lending facility at 0.30 percent. The rate on its deposit facility was held at -0.20 percent.

Meanwhile Denmark, whose currency is pegged to the euro, was forced to issue its second rate cut in a week in a bid to defend the krone. The Danish central bank trimmed its deposit rate from minus 0.2 percent to minus 0.35 percent.

Mario Draghi

Mario Draghi is the president of the European Central Bank, a member of the Group of Thirty, and was an honorary trustee at the Brookings Institution (think tank).

Note: David Walker is a member of the Group of Thirty, and was an executive director for the Bank of England.

Mervyn Allister King is a member of the Group of Thirty, and was a governor for the Bank of England.

Mark J. Carney is a member of the Group of Thirty, a governor for the Bank of England, a member of the Bretton Woods Committee, and was the governor for the Bank of Canada.

Masaaki Shirakawa is a member of the Group of Thirty, a member of the Bretton Woods Committee, and the governor for the Bank of Japan.

Lawrence H. Summers is a member of the Group of Thirty, a member of the Bretton Woods Committee, was the National Economic Council chairman for the Barack Obama administration, a trustee at the Brookings Institution (think tank), and a 2008 Bilderberg conference participant (think tank).

George Soros is a member of the Bretton Woods Committee, was married in 2013, and the chairman for the Foundation to Promote Open Society.

Foundation to Promote Open Society was a funder for the Brookings Institution (think tank).

Peter L. Woicke is a member of the Bretton Woods Committee, and was a managing director for the World Bank.

David de Ferranti is a member of the Bretton Woods Committee, and was a VP for the World Bank.

Johannes F. Linn is a member of the Bretton Woods Committee, and was a VP for the World Bank.

Caio Koch-Weser is a member of the Bretton Woods Committee, the vice chairman for the Deutsche Bank, and was the managing director of operations for the World Bank.

Moises Naim is a member of the Bretton Woods Committee, and was the executive director for the World Bank.

Ngozi Okonjo-Iweala is a member of the Bretton Woods Committee, was a managing director for the World Bank, and a visiting fellow for the Brookings Institution (think tank).

E. Patrick Coady is a member of the Bretton Woods Committee, and was the U.S. executive director for the World Bank.

Carole Brookins is a member of the Bretton Woods Committee, and was the U.S. executive director for the World Bank.

Jim Yong Kim was a guest at George Soros’s 2013 wedding, and is the president of the World Bank.

Ivo H. Daalder was a senior fellow at the Brookings Institution (think tank), and a U.S. permanent representative for NATO.

Anders Fogh Rasmussen is the secretary general for NATO, and was the prime minister for Denmark.

Lael Brainard was the VP & director for the Brookings Institution (think tank), is a member of the Federal Open Market Committee, and a member of the Federal Reserve Board.

Ben S. Bernanke is a distinguished fellow at the Brookings Institution (think tank), was the chairman for the Federal Open Market Committee, and the chairman for the Federal Reserve Board.

Stanley Fischer is a member of the Federal Open Market Committee, the vice chairman for the Federal Reserve Board, a member of the Group of Thirty, was a governor for the Bank of Israel, and the chief economist for the World Bank.

Bank of Israel is the central bank for Israel.

Shimon Peres is the president of Israel, and a friend of Haim Saban.

Haim Saban is a friend of Shimon Peres, a trustee at the Brookings Institution (think tank), the treasurer for the Saban Family Foundation, and a benefactor at the Saban Center for Middle East Policy.

Saban Family Foundation was a funder for the Brookings Institution (think tank).

Saban Center for Middle East Policy is a policy center at the Brookings Institution (think tank).

A.W. Clausen was an honorary trustee at the Brookings Institution (think tank), the president of the World Bank, and the chairman & CEO for the Bank of America Corp. (Bailout Company).

Robert S. McNamara was an honorary trustee at the Brookings Institution (think tank), and the president of the World Bank.

Susan E. Rice was a senior fellow at the Brookings Institution (think tank), is the White House national security adviser for the Barack Obama administration, and Emmett J. Rice’s daughter.

Emmett J. Rice was Susan E. Rice’s father, and the U.S. alternative director for reconstruction & development for the World Bank.

David Dollar is a senior fellow at the Brookings Institution (think tank), was the emissary to China for the U.S. Department of the Treasury, and the country director for China and Mongolia for the World Bank.

Timothy F. Geithner was the secretary at the U.S. Department of the Treasury for the Barack Obama administration, the vice chairman for the Federal Open Market Committee, the president of the Federal Reserve Bank of New York, and a member of the Group of Thirty.

Mario Draghi is a member of the Group of Thirty, the president of the European Central Bank, and was an honorary trustee at the Brookings Institution (think tank).

Paul A. Volcker is the chairman emeritus for the Group of Thirty, was the president of the Federal Reserve Bank of New York, the chairman for the Federal Reserve Board, and the chairman for the Wolfensohn Fund Management.

James D. Wolfensohn is the chairman & CEO for the Wolfensohn Fund Management, a director at the American Friends of Bilderberg (think tank), a co-chair, member for the Bretton Woods Committee, was an honorary trustee at the Brookings Institution (think tank), the president of the World Bank, and a 2008 Bilderberg conference participant (think tank).