Tuesday, June 7, 2016

ECB Begins Buying Corporate Bonds on June 8th, Markets Response Will Be YAWN!

The ECB latest push to fight deflation, a 1.7 trillion euro program of quantitative easing, will now include the purchase of corporate bonds. This program, dubbed "the kitchen sink moment", begins June 8th. Although this move is certainly more productive than buying unproductive government debt, it's unlikely to stimulate economic growth. Why?

Banks aren't stupid. The ECB will be buying Europe's garbage, the unproductive assets burdening rather than helping banks. In addition, monetary stimulus is generally ineffective unless paired with fiscal stimulus (changes) such as tax cuts and deregulation. The backdrop of socialism throughout Europe - free stuff for everyone funded by other people's money means frustration for anyone expecting change.

Headline: MarketsECB unveils final corporate bond buying details

The European Central Bank has unveiled further details of its eagerly anticipated corporate bond buying programme, stating, for example, that if one of the bonds it holds is downgraded to junk it will not be forced to sell, and reassuring investors it will be mindful of liquidity issues.

The ECB previously said it will only buy investment grade rated debt, but today it said it “is not required to sell its holdings in the event of a downgrade” to junk, raising the prospect of it holding so-called “fallen angels”, write Gavin Jackson and Joel Lewin.



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