The European Central Bank launched its much-awaited covered bond-purchase programme yesterday in a bid to kick-start the moribund euro zone economy, focusing on short-dated debt held by French and Spanish banks, according to analysts.
The plan, announced by ECB president Mario Draghi in September, aims to take rebundled debt off the balance sheets of euro-zone banks, thereby allowing banks to lend. Mr Draghi has indicated the ECB may expand its balance sheet by up to €1 trillion as it engages in unconventional measures to boost the euro-zone economy.
The launch of the bond-buying programme began as the French finance and economy ministers flew to Berlin for talks on France’s 2015 budget, which is expected to be in breach of deficit targets set by the European Commission under the stability and growth pact.
France indicated last month that it would again delay meeting its obligation to reduce its deficit to below 3 per cent of GDP by a further two years, sparking consternation in Brussels and Berlin. But France has remained defiant, calling on Germany to be more accommodative towards budget flexibility and investment, a case that has been bolstered somewhat by recent weak economic figures in Germany.
With a special euro-zone summit scheduled for Friday in Brussels following a meeting of European Union leaders, both countries are under pressure to reach some form of compromise in the coming days, although, technically, the European Commission is not obliged to return budgets to member states for revision until the Wednesday after the summit.
The commission is in constant informal contact with Paris and Rome, which both submitted their budgets last Wednesday for overview.
Though Italy is in the preventative rather than the corrective arm of the stability and growth pact, the commission is unhappy with the level of structural reform envisaged by Italy in its budgetary plans.
The start of the ECB’s bond-buying programme comes at a delicate time for the euro-zone economy. Last week saw the sharpest drop in equity markets in two years, prompted in part by Greece’s announcement that it intended to exit its bailout programme at the end of this year, before the International Monetary Fund portion of its loans finish.
While the market turmoil has subsided somewhat, there are continuing concerns of the health of the euro-zone economy. Inflation fell to a fresh low of 0.3 per cent in September, while GDP growth stalled in the second quarter.
Germany last week cut its growth forecasts to 1.2 per cent for this year and next, down from previous estimates of 1.8 per cent and 2 per cent. Its export-focused economy is being hit by low demand from other euro-zone countries as well as by the effects of Russian sanctions.
The IMF has also expressed concern about the euro-zone economy, predicting growth will reach 1.3 per cent next year, slower than the 1.5 per cent predicted in July.
EU leaders are expected to discuss plans for an investment package for Europe when they meet for this week’s two-day summit, which is also scheduled to discuss the new EU climate-change strategy.
Incoming European Commission president Jean-Claude Juncker has been sounding out senior figures from the ECB, European Investment Bank and the European Stability Mechanism fund about how to fund his proposed €300 billion investment plan for Europe, though a final plan is unlikely to be agreed before the end of this year.
Next Sunday the ECB will announce the results of its comprehensive assessment review of euro-zone banks, which has been ongoing in conjunction with national central banks since the spring. The ECB will assume supervisory control for the euro zone’s largest banks on November 4th.