The European Central Bank (ECB) decided this week to buy asset-backed securities ABS as well as covered bonds from banks, in an attempt to strengthen the feeble economic recovery in the Eurozone area and to avert the possibility of deflation.
These measures were announced by ECB Chairman Mario Draghi along with a further reduction of the ECB’s basic re-financing interest rate to 0,05% from 0,15% as well as the deposit acceptance interest rate to -0,20% from -0,10. Experts point out that such measures are similar to the printing of money and the relevant details will be announced publicly following the next meeting of the Board of ECB on 2 October.
Draghi hopes to achieve a fiscal policy mixture that will favour growth and is also planning, through TLTROs, to make it possible for the ECB to offer cheap loans to banks with a constant interest rate of 0,25% for four years and for a total amount of nearly 400 billion euro, in order to enable the banks to increase their lending to the real economy, i.e. to the businesses and households in the Eurozone.
However, these decisions have already come under fire especially in Germany, where many point out that the decrease in the interest rate was largely symbolic and it is not expected to yield any real results. Moreover, they also maintain that the decision to purchase ABS and covered bonds is a highly risky move, since these could also include toxic loans as well, reminding that ABS were partly to blame for the 2007 financial crisis and also warning that the ECB is running the risk of being accused of becoming the “bad bank” of Europe.
The Chairman of the Ifo Institute also expressed his opposition to the measures announced by the ECB, accusing the European Central Bank of having wasted all its weapons prematurely and for excessively reducing the interest rates.
All this points to one thing: there might be willingness to take corrective measures since everybody agrees on the need to help the recovery of the Eurozone, however there is a lack of consensus on what the measures should actually be and whether those decided already will be at all effective. Thus, as we have already pointed out previously the prospects are still gloomy and bleak and traders, especially those trading the Euro either in forex or binary options, should take this into account.