After EBC’s meeting, Portuguese bailout (JP Morgan)

By Tania Suárez, Madrid | Global growth will remain below trend until later this year, according to JP Morgan expectations. Rates have dropped less than 50bp from their peaks in 2011 and are projected to fall further 20bp until late 2012. Developed markets authorities believe that “the limit of zero interest rates has eliminated the possibility of conventional action.”

Meanwhile, emerging markets with still flexible rates, have “persistently high inflation and a desire to relax the strong credit growth limits the performance.” Given these limitations, JPMorgan experts point out, important decisions are expected by the Fed and the ECB at its meetings in September. They hope the central banks of both powers “continue along the path of unconventional easing.”

In that sense, JPMorgan sources explain that the risk is higher for the ECB, because

“it has to deal with a regional deepening recession caused in part by a significant tightening in credit markets.”

In addition to this, the framework introduced in August by Mario Draghi increased expectations that the European Central Bank would act to repair the monetary transmission mechanism by buying sovereign debt of those countries presenting appropriate policy conditions (credible adjustment programs).

“The emphasis in the right conditions, seek the support of northern Europe skeptical ignoring the Bundesbank,” JPMorgan team suggests. And so far, it “seems to have succeeded.”

These experts argue that Draghi has attempted to create a more durable majority for action among the rest of the Governing Council.

NEXT STOP, PORTUGAL

As for next ECB’s meeting on September 6th, JPMorgan analysts consider it likely for Draghi to outline the new initiative without giving specific details and that the biggest sign “shall be proved by the ECB’s actions.” These experts say that the meeting “should be followed by the intervention in Portugal”, which would “send a clear signal that the ECB intends to work actively” to eliminate “the risk premiums on short-term returns reflecting the risk of leaving the euro “.

JPMorgan considers an eventual Portuguese bailout as a solid possibility. This is a country where “short-term rates for both sovereigns and the private sector are very high”, but where “the adjustment program has been found to be on the right track.”

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