Last month, the European Central Bank (ECB) announced its own version of quantitative easing and confirmed that it is acquiring 60 billion euros ($69 billion) worth of government bonds over the next 18 months, and noted that the program is open-ended. The purpose of the move is to keep interest rates artificially low, spur economic growth and increase lending among financial institutions.
Bostjan Jazbec, Slovenian central bank governor and a member of the ECB’s governing council, told the Wall Street Journal on Thursday that QE could actually end prior to the Sept. 2016 target date. The reason why it could end prematurely is if inflation rises quickly and economic growth is seen.
Although a fixed date hasn’t been established, the ECB is honed in on consumer prices reaching near the two percent range – the latest data suggests consumer prices in the eurozone declined to 0.6 percent. Jazbec averred that if “the price mandate fulfilled, we can end it earlier.”
He added that one of the best ways for QE to work is for governments to implement structural reforms. Essentially, monetary policy initiatives and structural changes should collaborate in unison rather than in opposition to one another.
“The QE will have the full effect only if it’s complemented, not compensated, with all the needed structural reforms in the euro area. And I stress complement, not compensate,” Jazbec stated.
Since the financial collapse a few years ago, the post-crisis fiscal measure for central bankers has been to employ QE programs. Other countries have instituted their own types of QE endeavors and pumped trillions of dollars into the banking systems, including the Federal Reserve, the Bank of Japan and the Bank of England.
ECB bans Greek bonds
European and North American stocks tumbled and Greek bond yields skyrocketed as the ECB announced in a surprise move that financial institutions cannot use Greek government debt as collateral for loans. The central bank decided to revoke a certain waiver because it can’t assume that a successful end would come to the Greek government’s negotiations with lenders.
The ECB purported the suspension was similar to current eurosystem rules, but noted that the measure really has no impact on the counterparty status of Greek banks.
Moving forward, the Greek central bank will be prompted to give Greek financial institutions billions of euros in emergency funding. Analysts say that if the Governing Council OKs the decision then it would be the gravest response to the nation’s financial crisis and attempts to modify its aid-for-reform agreements thus far.
Jens Weidman, the governor of the Bundesbank, told the business newspaper Boersen Zeitung, that stricter rules needed to be in place to allow for emergency funding for the country’s banks.
“(Emergency liquidity assistance) should only be awarded for the short term and to solvent banks,” Weidmann said. “I am of the view that we should apply strict standards with ELA. If that should have consequences for financial stability, then politicians must live up to their responsibilities.”
According to Reuters, Greek bank shares plummeted 15 percent, which led the Athens stock market overall drop of six percent. Yields on three- and five-year Greek debt rose 220 and 190 basis points, respectively.
