By Vatsal Srivastava,
Greece is in the headlines for all the wrong reasons yet again. Until further political certainty is achieved, it is best to remain cautious and not rule out further volatility in Greek yields and European equities. However, unlike at the peak of the European debt crisis, wider contagion is a low probability event risk.
The European Central Bank (ECB) is widely expected to announce some form of quantitative easing (QE) in the first quarter of 2015. But the central bank may just act as early as in January (before the Greek vote) to restore confidence in the European financial system.
Clearly, the debate over European QE has shifted from if and when to how and how much. According to Citibank, the expansion of the central bank’s balance sheet to €1 trillion was announced when the ECB’s forecasts for inflation were at 1.4 percent for 2016. Since then, these have been lowered to 1.3 percent, with risks further to the downside since early December.
At that time, the ECB had used an oil futures price from December when Brent was $70 per barrel. We are $12 per barrel lower now. Thus, deflationary pressures are looming over the European economic recovery and this column would bet on the ECB rolling out QE next month itself.
Further, the question on every investors mind is whether or not the Greek election is a credible threat to the ECB policy going forward. Analysts at Citibank don’t see the developments in Greece as a major threat.
Firstly, they argue that QE is a monetary policy decision unlike the outright monetary transaction (OMT) which has a fiscal component) designed to address the Euro zone deflationary pressures as a whole. Political instability or default probability only adds to negative pressures as confidence weakens and feeds back into consumption.
Secondly, future ECB policy would be significantly impaired if it was perceived to be hijacked by regional politics. With communications an essential part of all central banks toolkits, political discussions in Greece can’t be seen to impair the effectiveness of a bank overseeing all countries.
Another channel that helps ease Greek pressures on ECB QE is potentially the ECB can exclude Greece from an asset purchase program should the political situation be perceived as too great a risk as was the case in 2012 according to Citibank.
The structural problems with the Greek economy would obviously continue even post the ECB QE. But expect a European rally in the buildup to the Greek vote as the market is positioning itself for ECB easing in January itself.
(31-12-2014- Vatsal Srivastava is consulting editor for currencies and commodities with IANS. The views expressed are personal. He can be reached at [email protected])