ECB Introducing Eurobonds by the Backdoor, Says German Think Tank

After the ECB unveiled the details about its bond- buying program last week, the single European currency has tumbled more than 2% in recent trading sessions. More Volatility Volatility In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders In finance, volatility refers to the amount of change in the rate of a financial instrument, such as commodities, currencies, stocks, over a given time period. Essentially, volatility describes the nature of an instrument’s fluctuation; a highly volatile security equates to large fluctuations in price, and a low volatile security equates to timid fluctuations in price. Volatility is an important statistical indicator used by financial traders to assist them in developing trading systems. Traders Read this Term across the currency markets ensued, sparking another leg of the seemingly unending U.S. dollar rally.

According to the President of the German IFO Institute, Hans Werner-Sinn, a widely respected economic think tank, the move by the European Central Bank (ECB) represents a widely misguided policy exercise.

As foreign Exchange Exchange An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv An exchange is known as a marketplace that supports the trading of derivatives, commodities, securities, and other financial instruments.Generally, an exchange is accessible through a digital platform or sometimes at a tangible address where investors organize to perform trading. Among the chief responsibilities of an exchange would be to uphold honest and fair-trading practices. These are instrumental in making sure that the distribution of supported security rates on that exchange are effectiv Read this Term brokers register higher foreign exchange volatility in March, the worries about the Euro Zone's viability in its current form increase. The latest voice comes from a widely respected German think tank from the heart of the German economy, the city of Munich.

Eurobonds through the Backdoor

The President of the IFO institute, Hans-Werner Sinn, criticized the bond purchases conducted by the ECB stating, “The justification for the purchases is merely a pretext, since there is no core deflation in the Eurozone, but a collapse in oil prices that is highly welcome in terms of the economy.”

“This is stimulating the economy and certainly doesn’t need to be combatted. The bond-buying programme is effectively leading to a depreciation of the euro, which can already be seen. But the ECB is not allowed to say that because exchange rate policy is outside its mandate”, Mr. Sinn said.

Expressing his worries about the future course of action, he warned, “The programme also makes it easier for states to accumulate debts via the printing press, which is forbidden. And 20 percent of purchases represent the de facto introduction of Eurobonds by the backdoor due to community liability via the ECB.”

Eurosystem Holdings of Greek Debt

At his press conference last week, the President of the ECB, Mario Draghi, explained that the central bank is already holding over €100 billion worth of Greek paper, as capital flight from Greece has been financed via the Eurosystem.

The IFO institute calculated that by the end of January, the country's payment obligations to international public institutions rose to 319 billion euros, which is 173 percent of Greece’s annual economic output.

Last week, the author of the bestselling book about the flaws of the design of the single European currency area, "The Euro Trap", Hans-Werner Sinn, said, “There is no way for Greece to avoid a third bail-out package, and further packages in the future, if it stays in the euro."

"It would be better for the country to formally default, exit and devalue, so that its real economy can get back on its feet,” he added in a statement from Munich.

The German think tank provided a breakdown of losses by country in case Greece defaults, which according to the IFO institute is inevitable.