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E.C.B. Begins Its Bond-Buying Program for the Eurozone Quiet Start to E.C.B. Bond-Buying Program for the Eurozone
(about 4 hours later)
FRANKFURT — The European Central Bank confirmed on Monday that it had begun its long-awaited asset purchase program, a 1.1 trillion euro bid to help revive the eurozone economy. FRANKFURT — The European Central Bank began its long-awaited bond-buying program on Monday, an unprecedented 1.1 trillion euro bid to help revive the eurozone economy.
The central bank’s president, Mario Draghi, had announced the starting date of the so-called quantitative easing program at the central bank’s meeting last week. Despite predictions that the central bank would have trouble finding enough government bonds to buy, officials in Frankfurt said they were not encountering any problems — at least on the first day of purchases.
“E.C.B. and eurosystem national central banks have, as previously announced, started purchases under the Public Sector Purchase Program,” the central bank said on Twitter. Initial market reaction was muted, reflecting the lengthy buildup to the so-called quantitative easing program, which by design eliminated any element of surprise.
The eurosystem refers to the network of eurozone national central banks, which are doing most of the purchasing on bond markets. European stock markets slipped slightly for the day, while the euro rose initially against the dollar before retreating to about $1.085. The effective interest rate or yield on German 10-year bonds fell to 0.31 percent from 0.39 percent, though it was not clear if the central bank’s buying was the main reason. Bond yields fall as prices rise.
The European Central Bank did not immediately provide details of the purchases, but it had said that it aimed to buy €60 billion, or $65 billion, in government bonds and other assets each month. The purchases will continue until September 2016, or until the bank’s Governing Council is confident that inflation is heading back toward the official target of below, but close to, 2 percent. The central bank’s president, Mario Draghi, announced the starting date of the asset purchases at the central bank’s meeting last week. On Monday morning, the European Central Bank confirmed on Twitter that the program had begun.
Because the purchases were expected, stock market reaction was muted. European shares slipped slightly, while the euro rose initially against the dollar before retreating to about $1.085. ”E.C.B. and eurosystem national central banks have, as previously announced, started purchases under the Public Sector Purchase Program,” the central bank said on Twitter.
Because of the demand, government bonds in the eurozone continued a rally that began last year, though the price of bonds fell in Greece, ​where uncertainty prevailed over the economic overhauls needed to extend its bailout. Euro area interest rates on bonds, which fall when prices rise, declined sharply in some countries, including Germany, where the yield on 10-year bonds sank to 0.317, close to the record low of 0.295 set on Feb. 26. The eurosystem refers to the network of eurozone national central banks, which are doing most of the purchasing on bond markets. Typically they are buying the bonds from large banks that act as dealers.
Much of the effect of the central bank’s policies was reflected in recent months in the rising prices of stocks and bonds. The central bank said in January that it would begin buying government bonds, and it had signaled well before then that quantitative easing was imminent. The goal of the program is to drive up inflation, which has slipped into negative territory and has raised the specter of deflation, a broad decline in consumer prices that can eventually undercut corporate revenue and force companies to cut staff.
Benoît Coeuré, a member of the central bank’s Executive Board, said in an interview on Sunday with Politis, a newspaper in Cyprus, that the asset purchase program had already had a positive effect on the eurozone economy, by pushing down the cost of credit. Central banks in the United States, Britain and Japan have used quantitative easing but it had never been tried in the eurozone until Monday.
The European Central Bank has said bonds will be purchased on the open market — not directly from bond issuers, in part to avoid accusations that it is violating a ban on central bank financing of eurozone governments. And it will wait several days before buying newly issued bonds to give financial markets time to determine a price.
But one side effect of the program could be to relieve pressure on government budgets. Most of the purchases are being conducted by national central banks, which will buy their own governments’ bonds and collect interest payments and other profits.
Later, the central banks will pass the profits back to their national governments. That means the debt effectively becomes free of cost to the issuing country.
One unresolved issue is how to deal with any losses suffered in countries like Germany, where many government bonds with maturities of seven years or less carry negative interest rates and thus will return less money than they cost. Opposition to the bond-buying program remains fierce in Germany.
“The bond purchase program will make the problems in Europe even worse,” Lüder Gerken, director of the Center for European Policy in Freiburg, Germany, said in a statement. “By lowering interest rates on government bonds the E.C.B. will further remove reform pressure on member states. At the same time the flood of money will lead to false allocation of capital and strongly raise the risk of bubbles.”
The European Central Bank aims to buy €60 billion, or $65 billion, in government bonds and other assets each month, spread out evenly over the month. The purchases will continue until September 2016, or until the bank’s Governing Council is confident that inflation is heading back toward the official target of below, but close to, 2 percent.
Much of the effect of the central bank’s policies was already reflected in the rising prices of stocks and bonds. The central bank said in January that it would begin buying government bonds, and it had signaled well before then that quantitative easing was imminent.
Benoît Coeuré, a member of the central bank’s executive board, said in an interview on Sunday with Politis, a newspaper in Cyprus, that the asset-purchase program had already had a positive effect on the eurozone economy, by pushing down the cost of credit.
“Lending rates to households and firms have come down since the summer across the entire euro area,” Mr. Coeuré said in the interview.“Lending rates to households and firms have come down since the summer across the entire euro area,” Mr. Coeuré said in the interview.
The purchases are being made roughly in proportion to the economic weight of each of the 19 countries in the eurozone.
In addition to bonds issued by governments, the European Central Bank and national central banks will also buy debt issued by government institutions such as the European Stability Mechanism, the eurozone bailout fund, and the Kreditanstalt für Wiederaufbau, a German development bank.
The European Central Bank said it would disclose details of the bond purchases on a weekly basis.