ECB Launches Landmark €1.1 Trillion Quantitative Easing Program

The ECB announced on Thursday that it would start its purchase of sovereign bonds on March 9 to support an accelerating economic recovery in the Eurozone, and would continue to do so until there was a “sustained adjustment in the path of inflation”. It is expected that this scheme will push GDP expansion to 1.5% this year, 1.9% in 2016, and 2.1% in 2017, compared with December projections of 1% and 1.5% for 2015 and 2016 respectively, and will also drive inflation back up to 1.8% by the end of 2017.

The announcement has already had an impact on the bond market, as buyers drove the yield on Italy’s 10-year benchmark down to a new record low of 1.34%, and the German equivalent to 0.34%. Some analysts have argued that the program could further distort the bond market where the shorter-term debt of several countries already has negative yields. However, ECB President Mario Draghi said that the ECB would continue to buy bonds provided the yields were above the central bank’s deposit rate of minus 0.2% (in effect limiting the price the ECB would pay for government debt).

ECB Publishes Eurosystem Oversight Report

On February 27, 2015, the European Central Bank (“ECB“) published its 2014 Eurosystem oversight report, the third such report, reviewing the oversight that the Eurosystem has performed in the period from 2011 to mid-2014.  The Eurosystem is the monetary authority of the Eurozone and consists of the European Central Bank and the central banks of each of the Eurozone member states.

The oversight report focuses on the Eurosystem’s oversight of financial market infrastructures, including payment systems, securities and derivatives clearing and settlement systems and trade repositories.

The oversight report also discusses future work priorities. The future work priorities state that the oversight priorities of the Eurosystem will still be driven by the implementation measures of the regulatory reform process and the need to avoid the emergence of systemic risks in the Eurozone. The Eurosystem will also conduct assessments of the design and operation of T2S, the securities settlement platform operated by the Eurosystem that is set to go live in June 2015. Finally the Eurosystem will continue to conduct regular analyses of correspondent banking activities and is currently reviewing its assessment guides for credit cards, direct debits and credit transfers.  Report.

Eurozone Member States Reach Preliminary Agreement on ESM Direct Recapitalization Instrument

On June 10, a statement by the President of the Eurogroup was published announcing that the Eurozone has reached a political understanding on the operational framework of a direct recapitalization instrument (DRI) for the European stability mechanism (ESM).  The ESM has also published FAQs setting out the detail of the agreement.

Once operational, the DRI would be applicable to systemically relevant credit institutions (as defined in the SSM Regulation (Regulation 1024/2013)) and to financial holding companies and mixed financial holding companies (as defined in the Capital Requirements Regulation (Regulation 575/2013)).  The DRI could only be activated if an institution was unable to meet its capital requirements, was unable to obtain sufficient capital from private sources and the ESM member concerned was unable to provide financial assistance without damaging its own fiscal sustainability.  Statement.  FAQs.

Eurozone Crisis: Will Europe Win the Battle? – Practical Advice to Address Your Redenomination Risks

On 9 December 2011, a new fiscal EU group was effectively formed as the Eurozone members and the other EU members (excluding the United Kingdom) agreed to a new multilateral agreement at a critical EU Summit in Brussels. The new agreement – the final provisions of which are to be agreed by March 2012 – will include measures for closer fiscal union. In addition to the new agreement, there were various financial measures agreed at the summit to strengthen the Eurozone’s ability to bail-out troubled members. Notwithstanding this new intergovernmental agreement, a change in Eurozone membership, at some time in the future, is no longer out of the question. It is timely for banks and other financial institutions and corporates to focus on their financial and legal redenomination risks. Our briefing note “Eurozone Crisis: Will Europe Win the Battle? – Practical Advice to Address Your Redenomination Risks” sets out a number of practical steps that will assist you in responding to a changing Eurozone landscape. Click here to read the briefing.