Draghi’s firm belief that only a staggering injection could save the day prevailed in the ECB Council. By launching a formidable one billion push, he baffled the markets and proved observers were wrong in predicting he could barely reach half that amount. In addition, he has achieved an open-ended monthly asset-buying plan firmly anchored as long as price levels fail to reach the 2% target, the device remaining in place at least until September 2016.
His only concession to German reluctance was capping ECB risk sharing to 20% of overall purchases, national budgets covering most of the potential losses. A negligible price to pay for securing a sweeping package.
Enforcing an open-ended device, lavishly endowed with massive money injections, stands as the key victory in his enduring tug-of-war waged against German fierce opposition. Any closed figure would have severely undermined the strategy. The heavily-loaded gun will also assuage market’s concerns in the coming months. Yet, the swift hike in asset prices would fail short of expectations unless the real economy recovers from its current sluggish trend.
Past performance does not look very encouraging. Pouring money into the financial system has blatantly failed its goal. The pocket-QE in force has proved unable to lure banks into selling first-rate assets in exchange for targeted money channelled to capital-consuming loans for SMEs. As enterprises and households struggle for reducing their huge outstanding indebtedness, demand for credit and liquidity remains firmly subdued in spite of the ECB’ cheap money policy. As the new package follows a similar pattern, a margin of doubt on its overall performance arises.
Purchases in the secondary markets will prevent the new scheme from falling hostage to banking needs and prospects. The ECB is making sure that huge amounts of fresh funds flood the market this time. In a further attempt to redress the dismal record of the medium-term targeted facility (TLTRO), the interest rates charged on beneficiaries will fall to a meagre 0.05%. This unexpected gift might tempt the financial institutions to lift their liquidity demands in future bids.
For all the merits a cheap money policy entails, recovering the shattered confidence of economic agents will not prove an easy task. Coupling the current ECB’s boost to morale with pro-active policies by Euro zone members for promoting a healthy and sutained growth seems essential. Fully exploting the fiscal room for manoeuvre and implementing large-scale reform plans play a key role, securing the ECB’s move, turns into higher growth rates. Otherwise, the current financial euphoria might prove short-lived.