So Mario Draghi finally unleashed his €1.1 trillion European quantitative easing bazooka. In short, and in case you missed it, the pertinent points were as follows:
- €60 billion a month of bond purchases including asset backed and corporate bonds.
- This will start in March 2015.
- Open-ended, but targeted to finish in September 2016 or when the inflation target of 2% has been reached.
- Maturity of bonds between two and thirty years but cannot purchase more than 25% of any one issue.
So the question is, is it enough?
The markets seem to think so. Since announced on 22 January 2015, Eurozone share prices have moved higher and the currency has weakened (as intended) against both the US Dollar and Sterling, which is helpful for European exports.
All seems well, or is it?
We see this as a positive but incremental step in underwriting Europe. However, first things first. Difficult economic times often lend themselves to political radicalism. Greece recently elected a leftist government under Tsipras on three key policies:
- Increase government spending
- Default on creditors, who they need to fund the spending.
- Taxing businesses who they need for employment.
Hard negotiations between Greece and the Troika will begin towards the end of this week and will extend over February. We feel a deal with the Troika and continued support for Greece is likely and thus continued membership of the Euro is more likely than not. However, it is not without its risks and for a populist coalition to back-down on some of these points may be a bitter pill to swallow.
We also believe that quantitative easing in Europe will be less effective than it has been in United States where they have had three rounds of quantitative easing over a five year period. Rates are already low – and lower than they were in both US and UK at the start of the QE programmes. US corporates are more linked in to the bond market so there was an immediate benefit in terms of access to cheaper funds. Europe is still much more bank driven in terms of finance and banks are still constrained in their lending policies. We have seen some uptake in demand for credit – we need to see a similar move in actual lending.
The push-back we saw in terms of risk-sharing in this QE programme also point to the underlying tension between core nations and the periphery. Greater banking or fiscal union would help solve this but in essence, this is a chicken and egg scenario with core nations looking for progress on austerity and structural reform before agreeing to any full union.
In the last five years we have taken a healthy sceptical view of Europe but while Mario’s efforts have resulted in a very satisfactory start to 2015 for all of our funds, we remain cautious, with the view that further structural reform is required to build a sustainable Europe.