QE may follow Greek elections

The ECB might have a window of opportunity next week to start buying Italian and Spanish bonds as part of a so-called quantitative easing programme if an anti- bailout party wins the Greek election this weekend, said Nomura International.

“Markets are behaving as if we are heading toward a breakup and this is very, very worrying for the euro area,” Jens Sondergaard, senior European economist told reporters yesterday.

“The ECB should cut rates by 50 basis points and launch outright QE.”

Spain and Italy appealed to policy makers to step up their response to the debt crisis after a €100bn bailout for Spanish banks failed to calm markets.

Greece’s election on Jun 17 may determine whether the country stays in the euro after an inconclusive May 6 ballot showed gains for political parties such as Syriza that oppose terms of the country’s bailouts.

While the ECB has said it is opposed to QE as it might be seen as bailing out governments, “there might be a window of opportunity next week if Syriza should win and the whole market moves toward a proper Greek-euro exit,” Sondergaard said.

If the ECB bought about €500bn of mainly Italian and Spanish bonds over the next six to nine months, that “would be a number markets would take as positive”, he said.

“We are in this unstable equilibrium where it’s not really fundamentals that matter”. This “should tell the ECB that this is serious business and they should push aside all these considerations that they’ve had so far in terms of moral hazard, in terms of reluctance to bail out governments, and step in as soon as possible”.

In the event of a Greek exit, authorities might also have to consider capital controls to prevent the flight of money from countries such as Spain to Germany, the economist said.

Bloomberg