As we already explained in numerous columns and articles over the past few weeks and months, we had serious doubts whether or not the Quantitative Easing program whereby the European Central Bank would pump 60B EUR per month in the ‘economy’ would trickle down to the ‘real’ economy. We expected the majority of the liquidity to stay in the ‘system’ as the sticky fingers of the banks would very likely use the funds for their own benefit instead of effectively taking care of their task as middle man to use the funds to re-start the economy in the Eurozone.
And the banks will very likely win on several fronts. As the additional liquidity injection on the markets will cause the volatility to increase, investment banks stand to profit from this as their clients will very likely try to anticipate further liquidity injections.
According to Citigroup , the revenues from trading fixed income securities has been decreasing since the end of the global financial crisis, but this trend might very well be reverted soon as investors are desperately trying to protect their assets from erosion. As the yields on most major investments are going south, it has been a very difficult exercise to keep the portfolio’s balanced and especially pension funds and insurance companies are at risk to get hit hard by the current low-yield environment.
Even the interest rates the governments of the more peripheral zones of the Eurozone are at ultra-low rates and we dare to bet nobody could ever have imagined Spain to pay less than 2% on its 10 year government bonds. Belgium’s case is even more drastic. Whereas mainstream media was talking about the B-PIIGS at the end of 2011 when Belgium’s 10 year bond rates were in excess of 5%, the current yield on Belgium’s 10 year government debt stands at less than half a percent.
This obviously also has an effect on the interest spreads and both Spain and Italy are now paying a premium of respectively just 1.11% and 1.14% . That’s an important indication that in the hunt for yield, asset managers are willing to take much bigger risks as the lower spread most definitely hasn’t been induced by those countries suddenly running a balanced budget.
So even though all of the Eurozone’s countries (well, except Greece) will be able to borrow more cash on the international markets at a lower interest rate, the benefits of the lower borrowing costs will go unnoticed by the general population. Instead of using these savings to start huge infrastructure works to jump-start the economy again, the financial break will be necessary to reduce the budget deficits to reach acceptable levels.
QE will NOT provide additional room to breathe for the countries, it will only help to reduce (but not even erase) the current budget deficits.
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