ECB: Building a Bridge to Nowhere?

EXCLUSIVE: Insight into the long-term pros and cons of the ECB's new bond-buying programme

Kathleen Brooks 14 September, 2012 | 9:00AM

This article is part of Morningstar's "Perspectives" series, which is a series of articles written by third-party contributors. In this exclusive article for Morningstar, Kathleen Brooks from FOREX.com provides insight into the long-term pros and cons of the ECB's new bond-buying programme.

Since the President of the European Central Bank Mario Draghi said that the eurozone is irreversible and the ECB would do “whatever it takes” to save the currency bloc, the markets have rejoiced. Bond markets in Europe’s troubled periphery have staged an impressive recovery, stock markets are higher and the euro is higher. The euphoria went into over drive at the September ECB meeting when the Bank announced an unlimited bond-buying programme to try and bring down borrowing costs even further for troubled members.

Looking on the Bright Side

But is this enough to finally bring an end to the sovereign debt crisis? Looking at the positives first there are two points of note that make the latest ECB plan admirable. Firstly, there is no denying this is bold action from the ECB. Let’s face it: every developed nation on earth relies on a well-functioning debt market. A country is a bit like a business, you need low borrowing costs to even out your cash flow and make the most efficient use of your capital. When those costs start to soar you have a major problem. The ECB is saying that it will stand behind the bond markets of Spain and Italy, which removes a lot of the dysfunction from these markets.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Kathleen Brooks

Kathleen Brooks  is research director at FOREX.com, which is a part of GAIN Capital. 

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