After the European Central Bank (ECB) launched (22 January) the EU-style quantitative easing (QE) – its long-awaited bond-buying program designed to revitalize the eurozone sluggish economy and counter deflation – some experts have been fast to express their doubts that the ECB’s massive €60bn-a-month ‘money-printing endeavor’ will bring the desired benefits. For example, bond expert Jeff Gundlach, the head of Doubleline Capital, argues that “The Europeans have decided to do quantitative easing, and I expect they’ll have very little success.” Speaking earlier this week (27 January) at an Inside ETFs (exchange-traded funds) conference in Hollywood, Florida, Mr Gundlach also said that “You wonder if all the king’s horses and all the king’s men will be able to keep Humpty Dumpty together.”
Despite the rather ‘depressing’ news coming from Athens that saw a landmark victory of an anti-austerity Syriza party earlier this week, European bankers and businesses have overall welcomed the QE package that will start purchases of vast quantities of bonds amidst a growing concern over a possible resurgence of the euro crisis. Rather than being a policy designed purely to aid financiers, QE is also expected to push interest rates lower, which will benefit the businesses and consumers. More money injected into the economy should help fight the omen of deflation in the eurozone. Contrary to a wide-spread popular belief, deflation is a bad thing because fall in prices essentially inflates the real value of borrowers’ debts while consumers tend to defer their spending in the hope that various products will soon be cheaper. The anticipation of looming QE in the market has prompted a dramatic fall in the value of the euro, which is good news for European exporters.
However, on balance, QE could also negatively affect banks’ margins, which is effectively determined by the gap between what it charges borrowers and the interest it has to pay depositors. With almost zero-level interest rates that depositors are now getting on their savings, and borrowers expecting ever cheaper loans, the result will likely be lower profitability for European banks. Yet another oft-discussed concern about the pros and cons of the QE, as also repeatedly expressed by German Chancellor Angela Merkel is that it may slow down structural reform across Europe and notably in the crisis-hit Greece, Spain, Italy and Portugal.