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Davos 2015: Delegates at World Economic Forum demand €1trn of QE

'€500bn is not enough to recharge the eurozone and to jump-start growth'

James Ashton
Thursday 22 January 2015 02:05 GMT
Snow business: action/2015's installation at the World Economic Forum in Davos
Snow business: action/2015's installation at the World Economic Forum in Davos (EPA)

Bankers, officials and economists lined up at the World Economic Forum to urge the European Central Bank and its president, Mario Draghi, to commit to €1trn of quantitative easing today.

However, unconfirmed reports circulated that the final figure for bond purchases could fall short of that total.

“Let Mario [Draghi] go as far as he can,” said Angel Gurria, secretary general of the OECD. “I don’t think he should cap it, Don’t say €500bn . Just say: ‘As far as we can, as far as we need it’.”

That view was echoed by Nouriel Roubini, professor of economics at New York’s Stern School of Business. “The question is can they surprise the market on the upside as opposed to the €500bn the market has already been priced in,” he said. “You would need at least a trillion over the next 12 months as opposed to the next 24 months with full risk sharing to have the necessary impact to stop deflation in the eurozone and jump-start growth.” Financiers agreed: “In my view, it should be an €1trn bond-buying programme – €500bn is not enough to recharge the eurozone,” said Blackstone’s John Studzinski.

The ECB is set to launch its own bond-buying programme six years later than other central banks, in order to pull the eurozone out of deflation. Consumer prices in the currency bloc fell 0.2 per cent year on year in December. The eurozone faces another serious test this weekend as Greek elections could usher the radical leftist Syriza party into power.

Earlier Anshu Jain, the co-chief executive of Deutsche Bank, told a panel session that “Quantitative easing will be of profound importance for Europe overall and particularly for banks operating in Europe,” because it would grind down net interest margins.

Mr Jain said markets were expecting the ECB to announce QE of about €750bn; €500bn could be “slightly disappointing” for markets and €1trn would be viewed as bullish.

At the same event, Douglas Flint, the chairman of HSBC, said that QE would boost confidence if it was successful but it must not be an excuse for eurozone countries to put structural reform on the “back burner”. If it fails, he added, the “magical abilities” of central bankers will be dented.

Similarly, Axel Weber, a former head of the Bundesbank, said QE was “only part of the fix” for the euro area, and that its viability could be under threat if other countries do not impose more structural reform.

“I think there will always be questions about the viability of the project, and Europe has not done enough to dispel these concerns,” he said.

However, The Wall Street Journal reported that the ECB is gearing up to announce purchases of €50bn of sovereign bonds a month for a year, implying around €600bn of QE. But it added that the programme could be extended.

Bloomberg, citing euro area central bank officials, said it could run up to the end of 2016, implying more than €1trn of purchases. The ECB declined to comment.

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