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:
- Purchase Euro-denominated Investment Grade corporate bonds (financial issuers will be excluded).
- 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.
- 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?
Answer: Yes!
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.
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