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Stand and deliver: Super Mario fires off a €1 TRILLION ECB spending spree

The central bank has finally announced its long-awaited money-creation programme.

Germany European Central Bank ECB president Mario Draghi Source: Michael Probst/AP/Press Association Images

Updated 5:12pm

THE EUROPEAN CENTRAL bank has pulled the trigger on a bond-buying programme worth more than €1 trillion bond in a bid to rejuvenate the failing eurozone.

President Mario Draghi made the announcement after the central bank kept interest rates at record lows ahead of the expected launch of the radical money-creation scheme.

He said the ECB would buy government and private-sector bonds worth €60 billion a month until September 2016 – putting the total value of the scheme at about €1.1 trillion.

Draghi said the quantitative-easing programme would start in March and would involve buying investment-grade eurozone bonds on the markets with the aim of lifting inflation back towards the bank’s 2% target.

Here’s a quick summary of some of the programme’s other key points:

  • Draghi left the door open for quantitative easing to run for longer than 18 months, saying the plan demanded a “sustained adjustment” in inflation
  • The package will involve a “risk-sharing” set up – 20% of the asset purchases would be covered for any “hypothetical losses” to national central banks
  • This suggests the remaining 80% will not be subject to risk-sharing, so individual member states will wear any losses on the remaining bonds if they go bad
  • Some of the money will come from the ECB’s existing stimulus programme, but it’s not clear exactly how much at this stage
  • The “large majority” of the ECB’s governing council – where Germany has been the biggest dissenter on quantitative easing – were in favour of the plan
  • Greek government bonds are left out of the plan as they don’t meet the ECB’s “investment grade” requirement

Germany European Central Bank Source: Michael Probst/AP/Press Association Images

Don’t worry about inflation

Draghi hosed down fears the money-creating programme would lead to rampant inflation because of the sudden injection of extra cash into economies, alluding to similar schemes which have been carried out in the US, UK and Japan.

“Have we seen lots of inflation since the (quantitative easing) programmes started, have we seen that?,” he said.

In these (past) three years we have lowered interest rates … and each time someone is saying that this is going to be terribly expansionary and this will lead to inflation. Somehow this runaway inflation hasn’t come yet.”

Spare a thought for the euro

The euro took a sudden dive after the ECB’s announcement and was trading at an 11-year low of $1.14 this afternoon.

Part of the expected effect of the cash-injection programme has been to drive down the euro because of the flood of new money.

Eurozone exports will be more competitive outside the common currency block, but the falling currency also means over 20% of the value of Europeans’ savings have been wiped out over the past year when compared to their US counterparts.

Exchange3 Source: Xe.com

Germany not a fan

Earlier today, the official lending rate was left at the 0.05% level the bank first set in September – seen as the “last throw of the dice” before the ECB was forced to start full-scale quantitative easing.

The EU’s most powerful economy, Germany, has been fighting the move on the grounds it will take the pressure off other countries to get their finances in order.

German Chancellor Angela Merkel, speaking before the ECB’s announcement at the World Economic Forum in Davos, said: “No matter what sort of decision the ECB will take, we should not become diverted from the fact that we as politicians need to put a framework for recovery in place.”

Germany Cabinet Source: Michael Sohn/AP/Press Association Images

But Berenberg Bank economist Christian Schulz told AFP that Draghi – who famously vowed to do “whatever it takes” to protect the euro – had delivered “once again” when it was needed.

He noted the ECB’s money injection was smaller than the Japanese government’s programme, but larger in proportion to GDP than any US scheme since the height of the financial crisis in 2008.

“The most important channel is the impact on confidence and expectations,” he said.

“An impressive announcement like the one today can boost investors’ and households’ inflation expectations.”

More demand for Irish property

Closer to home, Savills Ireland economist John McCartney said the ECB programme would mean more money going into property and added demand from overseas buyers because of the weaker euro.

“(It) will put further downward pressure on bond yields, forcing investors into higher yielding asset classes, including commercial property,” he said.

The French Embassy for Sale Source: Adeline Pericart/Photocall Ireland

Meanwhile, Fine Gael MEP Brian Hayes said the programme didn’t go far enough because of the low level of risk-sharing the ECB was offering.

“Mario Draghi said that only 20% of the asset purchases will be subject to risk-sharing,” he said.

Leaving national central banks to bear the main responsibility for any default that could potentially lead to a dangerous situation in the Eurozone. When the Eurozone is affected by a crisis, there should be a collective and mutualised response.”

With reporting from AFP

- First published 1pm

READ: The ECB will get radical soon to stop the eurozone going down a deflationary hole >

READ: This chart shows why you’re getting less and less US dollars for your euro >

About the author:

Peter Bodkin  / Editor, Fora

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