In a rather surprising move, last Friday saw the ECB (European Central Bank) announcing the agreement to purchase €500billion worth of sovereign bonds. Why is this important? Because this means a full-blown QE (Quantitative Easing) program in Europe is imminent and sets a precedent that is difficult to be ignored.
The ECB mentioned that the package will only consist of high-grade investments, which means buying bonds from highly rated countries, such as Germany, Italy, France, Spain. The rest of the program will be made through national central banks in each country. As for the amount of bonds to be bought, the allocation will be made in proportion to each country’s contribution to the ECB budget.
If true, this is a huge step forward and represents a win for Mr. Draghi, over the rigid Germans as the ECB Governing Council needs a majority for voting the package, and this can be done without Germany. However, having Germany on board will make the case for a solid trust in the institution. It would be unsurprising to see Germany agreeing to it as it represents a compromise when compared with what was initially rumored on the market: a package size of almost 1 trillion, with the central bank to fully buy bonds of all countries, especially of those who are in trouble (Southern states).
We should not jump to any conclusion yet though as it has not been announced officially….yet.
This makes the next ECB press conference on the 22nd of January one to remember and market reaction will be definitely different whether Germany agrees with the program or not.
The impact of this decision, however, is yet to be totally forgotten as only three days later, on the 25th of January, Greek elections may set the tone for a new EURUSD selling wave as the current polls suggest a clear victory for the anti-austerity party led by Alexis Tsipras. If indeed the Greeks chose to go that path, then all the efforts Mr. Draghi and ECB made, may be in vain as the single currency will face a bumpy road ahead.
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