Thursday, 15 January 2015

Without QE “Eurozone Financial Markets Would Collapse”

By Wolf Richter

The euro dropped to $1.16, the lowest since 2005. The ECB has imposed negative deposit rates on Eurozone banks, which are passing them on to their depositors. The ECB will flog savers until their mood improves. It has flooded the Eurozone with liquidity whose excesses are sloshing audibly through the system.

Despite the Eurozone’s economic issues, stocks have soared in recent years. As have government bonds. The German 5-year yield is negative; the 10-year yield dropped to 0.41%. Forget France’s beleaguered government and economy, and the downgrades of its credit rating: its 10-year yield is 0.67%; its 2-year yield is negative. Spain’s 10-year yield dropped to 1.49% before edging up a little. Italy’s 10-year yield fell to 1.70%. These countries are borrowing at practically no cost.

Since 2011, the Eurozone’s current-account surpluses with the rest of the world have risen sharply, approaching 4% of nominal GDP, despite the debt crisis and even while the euro was very strong. The November trade surplus, reported today, jumped to €20 billion, up from €16.5 billion a year ago.
And it’s precisely this environment that the ECB wants to douse with even more liquidity by buying large quantities of government bonds to force interest rates down even further and devalue the euro even more. Because now it would suddenly heal the various problems each of the 19 Eurozone countries might have.