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ECB tapering – How Mario Draghi will prevent a "tantrum" of the markets News

Saturday, September 2nd, 2017 | Economy

Because the financial markets have become accustomed to the unprecedented inflow of cheap money. If the ECB gradually lowers the constant financial jets, there will be severe distortions on the exchanges. But the currencies have a means which could make the difficult weaning more tolerable. You can control this process by pumping funds from matured bonds back into the market.
Banks expect such reinvestments to increase steadily from the coming year. According to this, the meltdown of bond purchases to zero – called "tapering" in the professional world – would be less painful. Rising reinvestments will help the central bank in their plans, according to interest rates Kim Liu from the bank ABN Amro ahead. "These are significant and mean that the ECB will continue to be a major player in the eurozone bond market for many years to come."
The central bank itself, however, is covered by how it reinvests the money from maturing papers. It merely announced that it would be flexible and as long as necessary. According to ECB data, repayments do not have to be repaid immediately, but the central bank can wait a few months. This gives it the necessary leeway to use the transactions when exiting the ultralock monetary policy as a tool of fine-tuning.
According to experts, the majority of funds from maturing papers will flow into federal bonds. Italian and French government securities are also likely to be particularly affected. This is a consequence of the so-called capital key. It determines the extent to which debt securities of a particular euro country are acquired. The key criteria for this are the economic power of the states and their share of the financing of the ECB.
As slowly as possible
Since March 2015, the ECB has been buying large-scale government bonds and other securities. In this way, it wants to push the economy and drive too low inflation from its point of view into the currency area. She initially purchased public debt securities with maturities of two to thirty years, now she buys papers from a year's duration. The total program has now amounted to 2.28 trillion euros.
According to ECB President Mario Draghi, the future of bond purchases will be discussed in the autumn. Most experts assume that the bank will throttle the monthly transactions from January of next year and then will eventually melt down completely.
Commerzbank economists Jörg Krämer and Michael Schubert expect the ECB to proceed as slowly as possible. "In concrete terms, we expect that in autumn for the first half of 2018, it will decide to reduce its purchases of probably 40 billion euros, but deliberately leave open the further development," the two estimate. Currently, the volume of monthly purchases is significantly higher at € 60 billion.
No second «Taper Tantrum»
The fact that the stock exchanges will not easily digest the tapering, Draghi had to experience painfully in June. When he said in a speech that the ECB could possibly go a less expansive course because of economic recovery, the financial markets reacted strongly. The yield of ten-year federal bonds climbed to an 18-week high, the price of the euro also rose to the top.
This brought back memories of the market upheavals four years ago, which entered the financial history as the word play "Taper Tantrum" ("withdrawal tantrum"). At that time the former US banknote Ben Bernanke had dared to signal for the first time a return of the Fed's bond purchases. Draghi wants to avoid any kind of exchanges.
It could help him reinvest the bonds. According to calculations by ABN Amro, the volume of such transactions could add up to 640 billion euros over the next three years. The first repayments of loans matured in March. Therefore, the volume of reinvestments is still low.
According to calculations by the Societe Generale, they were only 1.2 billion euros per month between March and June. In the first half of 2018 it could be an average of 8.2 billion euros. For the entire next year, the bank house ING predicts a monthly average of 11.5 billion euros in reinvestments, of which 3.3 billion in German debt securities.


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