“Optimism breaking out” with Australian economy to benefit from ECB’s debt buy up

The European Central Bank has announced a plan for a massive sovereign debt buy up in a move which is likely to shore up the Australian sharemarket and dollar.

The ECB will buy the debt of struggling governments, which will help keep borrowing costs down while giving the governments the funds they need to operate.

The stated aim of the program, named “Outright Monetary Transactions” is to “repair” the monetary transmission mechanism within the euro zone and to provide a “backstop” for pressured economies.

ECB chief Mario Draghi told reporters that unlike previous programs the OMTs would be subject to strict conditions and the ECB was not offering crisis-hit countries a blank cheque.

He said “we will do whatever it takes” to keep the eurozone together.

Markets around the world have rallied upon the announcement, suggesting investors support the move. But not all European countries approved of the OMT program.

Draghi told reporters there was one “no” vote to the OMT program on the 23-member governing council, saying: “I will leave you to guess who that was”.

Jens Weidmann, head of the German central bank, Bundesbank, has been highly critical of the program.

Craig James, analyst at Commsec, told SmartCompany the program should have a positive flow-on effect on Australia’s economy.

“If successful in stabilising European financial markets and allowing European economies to get out of the weakness they are experiencing, clearly it is going to be a positive,” he says.

“There is a lot of upside and not too much downside.”

James says what the Europeans are effectively doing is what the United States did a couple of years ago but the Europeans took a long while to come to that decision.

“Really there is not too much bad news. We should see gains of 2% in the European Union and 2% in United States, so there’s no reason we should not see that gain here in Australia,” says James.

“The icing on the cake would be if you had news out of China that it was going to provide stimulus to its economy.

“It does seem to be a case of optimism breaking out all over.”

Amber Rabinov, senior economist for ANZ, said, importantly, the design of the OMT program maintains the pressure on national governments to continue fiscal consolidation and structural reforms.

Rabinov also noted the ECB chose to leave its interest rates at their current all-time lows of 0.75%, as expected.

“It’s likely that the ECB sees any interest rate reduction at this time may not be effective, given that it views the monetary policy transmission mechanism to be ‘broken’,” she said.


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