September 6, 2012 Leave a comment
I am generally skeptical about the importance of further QE in the USA, but I am definitely not skeptical about the effectiveness of the the leaked European Central Bank plan to purchase unlimited amounts of European Government debt. The reason is that there are government bonds over here which terrify investors. That means that the amount which private investors must hold should have a fairly large effect on the price (different European government bonds are not at all close substitutes).
The leaked plan is a compromise between the sane and the German (two of my best friends are German) . Importantly the ECB will not place an upper limit on yields on bonds, that is promise to buy any amount if the price falls below some level.
The purchased bonds must be fairly short term bonds (the aim seems to be to make the intervention as ineffective as possible). Jana Randow and Jeff Black at Bloomberg report that up to three year bonds will be bought. Again this is based on leaks. Alarmingly Il Corriere della Sera reports both this claim and the dramatically contrasting claim (from a source identified only as “German speaking”) that the bonds will be of duration only up to 1 year. That would be almost pointless. I can’t get the corriere link (I read the article in the dead tree version and search ilcorriere is horrible). The key passage is “Draghi ha citato l’esempio di titoli circolante sul mercato secondario con scadenze ‘fino a tre anni’ secondo alcune fonti, o ‘al di sotto di un anno’, secondo altre che parlano Tedesco.” that is “Draghi gave an example of bonds on the secondary market with maturity “up to three years” according to some source, or ‘less than one year” according to other sources who speak German.”
In comparison QE II consisted of purchases of 7 year notes and Twist of (sterilized) purchases of 30 year bonds. My view is that QEII was totally pointless (didn’t even statisticall significantly affect the price of 7 year bonds) and Twist was at least better than QEII. So 3 years is not long enough. On the other hand, Spanish, Italian, Irish, Portoguese and especially Greek (PIIGS) bonds are not at all like US Treasuries. They are not close substitutes for money at alllll (I personally will absolutely not exchange any of my money for any such bond with maturity over 3 months).