German macroeconomics will determine ECB bond purchases

The Spanish risk premium has reached its lowest level since May 2010, when the euro crisis exploded and the former PM José Luis Rodríguez Zapatero announced the first adjustment measures. Back then, a QE of sovereign debt would have been better received by the markets so as to “save” the Spanish economy. However, with a risk premium below 150 points and a 10-year financing below 2%, the sovereign bond purchase seems to lose steam.

According to José Manuel González-Páramo, former member of the ECB’s executive committee:

“If the central bank had intervened so as to limit the Spanish risk premium, it would have been an absolute error. The risk premium has to do with the likelihood of recovering the investment –from the point of view of an investor. This means that the Spanish risk premium has to be a little higher than the German, due to the institutions and the imbalances that exist in Spain.”

Some voices from Madrid’s financial centre say, however, that markets take for granted the ECB’s intervention with a sovereign QE.

“The latest inflation data of the Eurozone, 0.3%, have confirmed that prices keep on falling”. Furthermore, the ABS program is far below that of the US, and the purchase of corporate debt wouldn’t have “good press”.  As a matter of fact, “this could be understood as a selective aid for companies, while the sovereign QE would be addressed to all States.”

Nonetheless, some market watchers subordinate the sovereign debt purchase to the development of the German economy. According to Mar Barrero analyst at Profirm, “the ECB will be very cautious and it will delay the program until Germany has clear signs of a great weakness as well as until its macroeconomic figures hold on.”

She thinks the European periphery would be interested in the sovereign debt plan. This is what has boosted the markets in the last weeks.

Experts at JP Morgan estimate that the likelihood of the ECB conducting the sovereign bond purchase program is 30%.

 

 

 

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