Winter is coming: QE is coming to an end… and Spain will have to face reality

I’m sure you’ve heard many people say we’re on the verge of a new recession; it may take some months, even a year, but things are starting to get weird out there… and for good reason. After the Great Recession of 2008 (whose wrath we’re still suffering in some countries), the European Central Bank decided to start a measure called “Quantitative Easing” (QE) to help the countries recover and get back on the track of economic growth and employment.

First off, how does QE work and why did the ECB do it? Good question! The ECB has a few goals set and the power to work on those goals, that is, it tries to keep the inflation levels close (but below) 2% and it can work with the amount of money there is in the system to help modify the macroeconomic data forecasts and the expectations. Therefore, QE is a relatively easy way to increase the amount of money and help the markets regain their trust so that the cycle continues.

Sometimes things don’t work that easily. Source: tradingfloor.

Starting in 2015, the ECB bought bonds from commercial banks (e.g. Santander, Deutsche Bank…) to increase the price of said bonds and create (!) money in the banking system. If the price of the bonds increases, that means the interest rate will lower, resulting in many interest rates fall. Therefore, loans are cheaper and… you got it right! People (and businesses) can borrow more and pay less. Consumption will grow and so will investment, because the new conditions are more flexible and the risk is lower. As a result, the employment rate grows and the economy will start growing again as a whole. Easy? Not at all!

The ECB started buying government bonds (i.e public debt) to help the countries keep unemployment rates low and fight the lack of tax revenue that became a problem after 2008. Starting at €60 billion (€ a month in March 2015 (now €15 billion/mo until 2019), QE is coming to an end after 3 years in which the ECB has bought over €2.5 trillion in (mostly) public assets. To make it clear, Euro countries have been on steroids for 3 years and are now forced to face reality. Some countries, like Germany and France, are ready for it, but some others like Spain or Italy are still far behind and need to do their homework before QE is finally over.

QE will stay until 2019, but it’s getting less important every month. Source: PIMCO.

With €2.6 trillion in the market and no signs of actual recovery, there is very little the ECB can do, other than stopping taking risks and escape the 0% interest rate before it’s too late. There are many variables that are worth mentioning, such as oil prices (which have helped with Spain’s artificial growth) and public deficit (now in serious discussion as Spain’s budget for 2019 is “delusional” or just worrying for some authorities).

The goal was 3% or below, but we’re not getting there.

QE was intended to help countries find effective measures to grow, create jobs and recover from the impact of the Great Recession. The €30 billion in bonds that Spain got “for free” every year was nothing but a patch to help Spain’s government make the necessary adjustments to either increase tax revenue or reduce public spending (or both). However, nothing has changed in 5 years, other than the fact that Spain is now €100 billion in debt with the ECB and won’t find a way to get €30 billion a year at a reasonable rate. A total failure, if we take a moment and look past the (relatively low!) unemployment rate and the GDP growth. We still have a country that is €1.2 trillion in debt with the rest of the world, with shockingly high unemployment figures and living mostly on low-quality tourism that creates low-quality jobs. €30 billion is roughly 3% of Spain’s GDP. Denial stage needs to be over. Good luck with that.

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