What did the ECB do? In an effort to kick-start the euro zone’s flat
lining economy, the European Central Bank cut interest rates to a record low of 0.05 per cent and, more importantly, unveiled a plan to buy asset- backed securities from banks.
What the hell are asset-backed securities?
These are pools of loans packaged and sold as securities. In simple terms, a bank collects its credit-card loans or a batch of mortgages and sells it on to a third party in return for cash. The idea is to free up the banks to lend money into the real economy.
How will it work?
Ideally the cash the banks receive for these asset-back securities can then be used to support news loans to borrowers. By making it easier to obtain loans, interest rates will drop and consumers and businesses will borrow and spend, which should, in theory, drive growth and prop up inflation.
How much of these securities will Frankfurt buy?
ECB president
Mario Draghi
did not specify how much had been set aside for this asset- buying programme but reports suggest the bank is ready to deploy about €500 billion over three years.
Is this quantitative easing
? This is disputed. Quantitative easing (QE) normally refers to the printing of money by central banks to buy assets, typically government bonds. Usually, central banks try to raise the amount of lending and activity in the economy indirectly by cutting interest rates. However, when rates can go no lower, as is the case in Europe now, the bank's only option is pump more money in directly.
Why is the ECB so wary of traditional QE?
Unlike the US, Britain and
Japan
, who have enacted large QE programmes to tackle the financial crisis, Frankfurt has remained steadfast against the idea for a variety of reasons. Under traditional QE, the ECB can’t be sure the new money will find its way into the real economy, hence its opted for a more targeted approach.
How
did markets react? Immediately after the ECB’s announcement European shares jumped to a six-year high, albeit profit-taking has sent shares down again. Yields on euro-zone sovereign bonds are continuing to fall as investors remain wary that stocks are over
priced after a near seven-year rally.
Why does this affect Irish bonds ?
Risk-averse investors drove yields on Irish two-year notes into negative territory yesterday for the first time on record. A negative bond yield may seem self-defeating, when you can put money on deposit, but tax rebates for holding Irish debt can offset the negative yield.
