Philadelphia, Pennsylvania – (StockNewsDesk) – 10/03/2014 — In a long-awaited move, European Central Bank Chairman Mario Draghi announced that the ECB would begin buying securitized loans and other various forms of debt to give the weakening European economy a boost. This move by Draghi is welcomed by those in Europe who are concerned about growth and met with skepticism by those worried about financial stability or inflation risks.
Weakening European Economy
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Due to the recalcitrance of Germany to support any form of economic intervention, the only way to justify aggressive, marginal action is by market pain. However, the market pain has been blunted, as investors and traders believe that intervention is imminent. Thus, stock prices and yields do not fully reflect the bleak situation in Europe. To improve the economic situation in the Eurozone, the major stumbling block is the political consensus.
The Eurozone economy is beginning to flirt with negative growth and inflation, a disastrous scenario as there is the risk of going into a deflationary spiral, in which people’s hoarding and lack of spending worsene these conditions. Another warning sign is that inflation expectations continue to plummet despite Draghi’s move at the last meeting to cut interest rates to record low levels. Even Draghi has stated that this preferred measure to evaluate the efficacy of his policies is to watch inflation expectations.
Interest Rate Cuts
The ECB left interest rates at 0.05 percent from last month’s meeting. There were some who were predicting a negative interest rate, as a desperate measure to boost lending and spending. However, it seems the ECB is saving this for a more dire situation.
The new program to buy bonds and other forms of collateralized debt will begin next month. Furthermore, the program will last two years and hopes to inject close to $400 billion euros into the economy. Market reaction to this news was muted, as it is nowhere close to the full sum required to boost inflation expectations and growth measures. However, given the political constraints not much is expected from this meeting.
In fact, European markets across the board were down more than 1% following the meeting. This is a troubling sign as typically this kind of measure leads to short-lived rallies, at the least. Although technical bounces in oversold conditions are expected, these latest efforts are dismissed by the market as not being potent enough. Because of the political stalemate between Northern European countries and periphery countries on the right path to mend the economy, no remedy looks to be in sight until more market pain is felt by all parties.
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