Monday 17 December 2018

Ireland reaps the biggest benefit from QE: Moody's

European Central Bank’s balance sheet is at €4.5 trillion on the back of QE
European Central Bank’s balance sheet is at €4.5 trillion on the back of QE

Gretchen Friemann

Credit ratings agency Moody's has singled out Ireland as one of the Eurozone's chief beneficiaries of the ultra loose monetary policy regime that has boosted asset price in the region.

According to Moody's, the European Central Bank's massive stimulus scheme, known as quantitative easing (QE), has lowered government borrowing costs in the Eurozone by between .50 and 1.50 percentage points a year for 10 year bonds.

It said the impact has been greatest for Ireland and Portugal.

But Davy's global strategist, Donal O'Mahony, took issue with the report, arguing the analysis was too simplistic.

He pointed out that Ireland faced a QE taper over the past year with the Central Bank reducing its asset purchase rate from over €900m in 2016 to just under €500m in 2017 as the bank approached a threshold that restricts the ECB from holding any more than 33pc of eligible bonds from a single state.

That reduced the impact of QE here.

According to Mr O'Mahony Ireland's falling borrowing costs - the yield or effective interest rate on 10 year debt now trades at close to 0.40pc a year compared to about 1.2pc at the start of 2016 - reflect broader trends at play in the domestic and global economy.

These include rising employment, low volatility in capital markets and investors' increasingly adventurous dash for yield.

He stressed that Greece, which was not included in the ECB's QE strategy, has the best performing government bond market of the region, underscoring the heightened appetite for risk.

Read more: State to get bulk of €280m Anglo payout

The ECB's balance sheet has ballooned to €4.5 trillion on the back of QE, stoking fears that while borrowers, including governments benefit, it may have fed another asset price bubble.

The latest report comes as rapidly inflating property values here echo trends from the boom era. Yesterday an as-yet unbuilt penthouse in Dublin's Ballsbridge sold for €6.5m, the highest price ever paid for an apartment in the State.

Real estate is not the only asset class to rise in value. The trend is across the board and spans equities, bonds, as well as fixed income assets.

Moody's said interest rates are likely to "normalise" at "lower levels than those seen prior to the financial crisis" meaning they'll stay low for the foreseeable future.

Mr O'Mahony said the policy as unnecessary, but noted that boom-like characteristics are strikingly different this time round, as the excess cash in the market is "real" rather than "synthetic" or artificial, which resulted in the previous catastrophic build-up of credit.

Irish Independent

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