WITH THE euro at an all-time low due to excessive debt, the European Central Bank (ECB) decided to unveil its latest effort to aid debt-ridden nations: a bond-buying program that would boost each country’s economic standing and lower its borrowing costs.
ECB President Mario Draghi released a statement to the public laying out the overview and goal of the program, that is “[to] address severe distortions in government bond markets,” which he believed originated from “unfounded fears on the part of investors of the reversibility of the euro.”
The program is available to all European countries but its main targets are Spain and Italy, whose borrowing levels escalated to unsustainable earlier this year.
Spanish banks bad debts have been rising at a constant rate since the country fell victim to recession. The value of debts has then risen to €169.3 billion in July, the highest amount of bad debts since the ECB started collecting data in 1962.
Italy is in a slightly better situation and can survive a bit longer before agreeing to the ECBs plan of action. Despite having debts valued at 120% of its economy, Italian Prime Minister Mario Monti dismissed any decisions on Italys potential call for help as “premature.”
Terms and conditions
In order to avail of the program, Draghi said that countries must satisfy certain conditions, including the activation of the two Eurozone rescue funds—the European Stability Mechanism (ESM) or the European Financial Stability Facility.
The ESM is a fund supported by 17 countries and should be available for action in October. Its purpose is to provide support and aid to countries that have fallen into financial conflict and are not able to borrow normally.
When institutionalized, it would be able to lend about €500 billion out of its €700 billion in reserves to buy out the bonds of Spain and Italy.
Global markets surge
The ECBs program has boosted investor morale, therefore revitalizing stock markets around the globe. In September, the euro hit a two-month high against the dollar as investors responded to the ECB’s good news. Also, all three major indexes in the US closed in on their highest levels in years, as investors anticipated favorable market conditions.
Export dependent Asian nations such as Japan, Korea, Hong Kong and the Philippines also had increasing indexes with Japan’s Nikkei 225 index rising by 2.2%, Korea’s Kospi increasing by 2.6%, Hong Kong’s Hang Seng climbing 3.1% and the Philippine Stock Exchange ascending by 1.1%.
Lean Adriel Llanes, a trader for Rizal Commercial Banking Corporation, noted the program’s positive effect on the Philippines, “Our country remains to be attractive to foreign investors as we offer better yields, backed by solid fundamentals.”
Joan Dayrit-Morales, currently a freelance foreign currency trader, commented, “The bond buying of the ECB will bring down borrowing costs and stimulate economic activity in these struggling nations and, conversely, perk up export revenues of Philippine exporters to this region.”
Not a sure way out
The debt plan, however, still remains doubtful on certain grounds. Janney Capital Markets’ chief fixed income analyst Guy Le Blas warned, “Essentially, if a bailed out country doesn’t meet its financial target, the ECB stops buying, and the borrowing rates go through the roof.”
Eulogio Catabran, executive vice president and treasurer of the United Coconut Planters Bank said, “In the long run, the debt woes of the eurozone are far from over and thus, the euro is still in trouble.”
ECB policymaker Joerg Asmussen stated that there is no time to relax. “The European Central Bank’s new bond buying program is no substitute for government reforms and belt tightening,” he told Reuters, as he noted the pressure on Spain and Italy to rebuild their frail economies.
The plan, after all, is not a substitute for the efforts in economic reforms that governments across Europe are being pressured to pursue.
