Draghi fails to deliver

Draghi fails to deliver | The Corner

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Draghi fails to deliver

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Markets draghi, ecb, ecb's monetary policy, qe, sovereign bond purchases MADRID | By JP Marín Arrese | Markets took Mario Draghi´s encouraging promises at face value a couple of weeks ago. However yesterday’s ECB Council meeting failed to endorse any move to bolster the QE strategy. Super-Mario was only able to renew the central bank´s firm commitment to act should economic prospects markedly deteriorate. Investors felt utterly upset and reacted accordingly.

Following markets' bet, the sluggish performance will force the ECB to buy sovereign bonds, all other measures being shrugged off as utterly pointless. The thrust towards ABS and covered securities is proving to be a flaw, amounting to around €20 billion to date. Much the same is happening to targeted medium-term liquidity tenders. September´s offering largely failed to reach its goal, a telling sign that banks are showing a growing reluctance to build up extra resources while credit demand lacks stamina. Only sovereign intervention can save the day. Anything short of it will come as a blow to confidence. Yet, betting on cheap money to solve the problems could prove misleading. The ECB´s quantitative easing strategy can only succeed should it reverse the current deflationary mood. Achieving this goal involves higher price expectations that lead to interest rate hikes. Nothing of the kind is happening as the QE strategy unfolds. Bund yields are falling, showing a growing lack of confidence in Europe’s recovery. They also reflect the market’s negative appraisal on measures implemented up to now. Extra liquidity only serves to push up asset prices while failing to invigorate demand and growth. Those advocating a massive public bond buying seem to be betting on lower rates to get us out of trouble. They fail to perceive that only higher rates would signal better expectations for recovery. That is the virtuous pattern followed by the US economy in response to the asset buying drive implemented by the Federal Reserve. A very different picture is emerging in Europe, as monetary easing only results in lower yields. A bad omen for the ECB strategy.

http://www.thecorner.eu/financial-markets/draghi-fails-deliver/42393/

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