QE around the world

Contemporary Issues on International Financial Markets

Angelo Montalbano 105300370

What is it?
1. The Central Bank creates lots of money crediting its own bank account.
2. The CB use the cash buying government bonds
or other financial assets from financial firms such
as banks, insurance companies and pension funds

3. Companies that have sold bonds may use the cash

received to invest in other companies or lend to
individuals

What is it?
4. If these institutions are more enthusiastic
about lending, the interest rates they charge
should fall, so more money is borrowed and spent
and the economy is boosted

5. Once the economy has recovered, the CB sells

the bonds and destroys the cash it receives. That
means in the long term there has been no extra
cash created

Monetary Policy: Open Market Operation VS QE

Open Market Operation

QE

Aim

To reach a desired target for the

interbank interest rate

Economic Recovery

How to do it

Buying or selling financial assets on

the open market

Raising the money supply, interests

rates drop and it is easier to
borrow money and investment

Which limits

Government bonds are the only one

asset CB can buy

CB can buy whatever financial

asset

Problems

If a recession continues even when

interest rates are nearly to zero, the
central bank can no longer lower
interest rates

Over effects against deflation in a

longer future

The First User: Japan

Domestic deflation, consequences of the first financial crises of 1997 and the dotcom bubble that exploded on 2000
What to do?
BOJ had maintained shortterm interest rates at close
to zero since 1999
19 March 2001 Quantitative
Easing was used for the first
times in modern times by
BOJ

The First User: Japan

None of the previous attempts to jolt the
economy was successful
Countermeasures:
On October 2010 BOJ announced the purchase
of 5 trillion ($60 billion) in assets
On August 2011 BOJ expanded the program UP
TO 55 trillion
On 4 April 2013 BOJ announced the Qualitative
and Quantitative easing. This policy, was based
upon fiscal stimulus, monetary easing (the
purchase program was extended to 70 trillion)
and structural reforms

Shinz Abe
Prime Minister of Japan
QQE is named also Abenomics in
his honour

The First User: Japan

As of 2015:
The GDP growth was 3,5%
The exports grew of 12%
CPI index trend was moving upward
The inflation had reached 1,2%
The stock exchange transactions grew of 55%

Nonetheless due to the overwhelming debt created,

(in 2014 it was 230% of the GDP moving from 170% on
2007), the economic growth was slowing down

QQE brought to a depreciation of the

yen, a diminished unemployment, a
slight recovery of the economy and an
inflation growth from its introduction,
but it even more true that right now
the situation has not yet changed and
the inflation rate in again under 0%.

A Second Comer: US
In the wake of the global financial
crisis, the financial system in the
US was still reeling from the failure
of the investment bank Lehman
Brothers. There were also
widespread fears about the wider
economic consequences
The FED didnt get any result
cutting interest rates and bringing
them close to zero. So it tried with
QE, its target were employment
and inflation

QE (infinity) wont finish until employment or inflation improve

A Second Comer: US
Gold an gas prices as wall as house market price rose over the period. S&P 500 index gained 113% thanks
to low interest rates over the period. Of course, looking at markets performance as a proxy of the overall
economy one is not the most correct thing to do.
First of all, QE raised the debt
harming the economy health: from
$9.000 billion in 2007 to $17.700
billion at the beginning of 2015
Secondly the the toxic assets owned
by FED raised to $4.250 billion at the
end of 2014 + $3.500 billion respect
to 2007

A Second Comer: US
The FED did address inflation and
employment: the inflation has always
been near 2% all over the period (20092015) with a peak of almost 4% in 2011
and a 0% in 2015

The unemployment rate is raising, but mainly

tanks to the rising part-time employment.
Either ways the result if far from what it was in
2009 or before

Within Euro Area: UK

In 2009 BOE cut
interest rates from
5% to 0,5%, but
the measure has
been Judged too
weak

In March 2009 it started QE

and purchased around 200
billion of UK government
securities (gilts) and highquality private assets
(private company debt)

In October 2011 the BOE created an

additional 75 billion. Then both in
February 2012 and in July 2012 it
announced an additional 50 billion
bringing the total amount of the
purchasing program to 375 billion
Gilts yields strongly decreased
The private lending did not increase, but the
private sector recurred to the capital market
The GDP strongly grew, only in 2014 its trend
will be reverted
(Right now due to Brexit consequences is really
difficult to evaluate its economic performance)

European Union: the context

The great crisis consequences were strongly accused in every

EU country
Coping with bank systems liquidity problem, a lot of country
raised their debt balance especially the PIIGS (Portugal, Italy,
Ireland, Greece, Spain)
Furthermore the downgrading of several countries rating done
by the major agencies such as Standard & Poors, Moodys or
Fitch contributed to spread the fear of several possible
defaults within the Union

European Union: a peculiar system

QE can be carried out if the CB controls the currency used in the country. The National Central Banks (NCB) in
the Eurozone cannot unilaterally decide to employ QE. They must instead rely on the ECBs governing council
(composed of all NCB governors) to agree on a common monetary policy. The NCBs can then implement it

The ECB as an independent entity has the price stability as its only one objective (2% inflation) and cannot
interfere with union countries policies: is not allowed to buy government bonds. Indeed, the situation is far
more different from the one in US, Japan and UK given that the QE has its base in government bonds purchase

European Union: MROs & LTROs

After cutting interest rates, the only think remained to do was
helping national banks that were burdened with liquidity
problems

Auction System:
The winner bank would have got credit at
the condition previously decided
corresponding solid collateral
MROs thanks to their short maturity were
thought for responding to commercial banks
liquidity problem and contributed to
determine markets short term interest rates.
The LTROs instead, due to their longer
maturity were less stressful to repay and
determined long term market interest rates

European Union: MROs & LTROs

Though these two operation acted
as a QE giving liquidity to banks,
any result has been achieved
because banks used the liquidity
to increase their reserves and
government bonds portfolio. Any
credit was granted to the private
sector
The only result achieved was that
thanks to decreasing interest rates
governments got favourable
condition over their debts
preventing the default risk

European Union: Outright Monetary Transactions

On 6th September 2012 were announced the OMTs:

the ECB could buy countries governments bonds at
one condition: the countries should have put in
act determined economic policies

Though the OMTs were never put in act, the

ECB announcement alone made short and long
term rates over PIIGS government bonds drop
of 2%, but in the end no real effect over the
economy were achieved.

European Union: QE
On 22 January 2015 the ECB President Mario Draghi announced the QE. The amount of public debt and asset
backed securities purchase program was 60 billion a month then expanded to 80 billion
. The program was thought to not stop either until September 2016 or until 2% inflation was achieved

Announcement Consequences:
Government bonds rate
collapsed
Private lending rose of 1,9%
Stoxx 600 indexs growth was
14%
Slight signals of recovery in the
Euro job market

European Union: QE

The QE results are not

clear. The 2% inflation
target in far from being
achieved. From this point
of view QE has been
totally ineffective

European Union: different visions

The German Chancellor Angela Merkel disapprove QE and
claims structural reform
According to the director of the IMF
Christine Lagarde: QE policies
contributed to the reduction in
systemic risks and to the
improvements in market
confidence

ECB President Mario Draghi strongly supports QE and

declares that its weak effects are to attribute to the
gripping uncertainty concerning the Union future. He
auspicates for a unitary economic policy within the union

Q&A

Thanks for the attention!