It must be quite busy at the ECB’s headquarters in Frankfurt these days as not only did the ECB kick off its first (official) round of Quantitative Easing, it’s still front-running on Greece’s rescue. In its Q&A session with journalists, ECB president Mario Draghi confirmed the ECB has stepped up its efforts to keep Greece in the Eurozone, as it has roughly doubled its lending in just 6-8 weeks time. This means that since Syriza has won the Greek elections in January, the ECB had to step in to save the Greek economy and financial system from collapsing.
This seems to show the ECB is willing to go far, very far, to keep the Eurozone united (and Greece in) as the ECB’s lending to the country is now at a stunning 68% of the GDP. On top of that, Greece wanted to be included in the ECB’s Quantitative Easing program, but Draghi has now explicitly excluded the purchase of Greek bonds as long as the threshold of 33% has been breached and the ECB will NOT be allowed to purchase Greek bonds before July/August.
The Greek situation remains extremely dire, as the ECB confessed it once again had to increase the allowed amount of the Emergency Lending Assistance to Greece by another half billion Euros. The jury’s still out on Cyprus as well as the country needs to get the thumbs up from the Troika in its fifth review.
The markets have been jubilant after the QE started earlier this week (and roughly 10B EUR has already been purchased, pushing for instance the Spanish 10 year yield to below 1% (!) ) and the value of the Euro is crumbling fast. When analysts were predicting an Euro-Dollar parity last year, almost the entire financial world was shaking its head in disbelief, but at an exchange rate of 1.07 (meaning the Euro lost approximately 15% of its value in just 3 month) that scenario is suddenly extremely realistic.
It gets even more interesting now as more voices are expressing their expectations to see the Euro lose another 20% to reach a value of 0.85 EUR per Dollar. That’s quite interesting as such a weak Euro would indeed be excellent to jump-start the economy again, but on the negative side, the American export markets would start to collapse. It would be much cheaper for foreign consumers to purchase European products compared to American products. Who do you think will either be able to sell more planes or to book a higher profit at a EUR/USD exchange rate of 0.85, Boeing or Airbus?
The expensive dollar makes it tougher for Europeans to buy stuff denominated in US Dollars. Plane tickets are much more expensive – despite the falling oil price and the purchase power of almost every European citizen will be undermined by either the strong US Dollar. On top of that, if the ECB is indeed able to increase the inflation rate again, citizens of the Eurozone will see their purchasing power erode at an even faster pace.
And guess what once again proves to be an excellent asset to protect yourself from losing purchasing power? Indeed, gold. As you can see on the previous chart owning gold would have protected any consumer in the Eurozone as an ounce of gold has kept its value. Forget about the naysayers who say gold is useless, as it has proven its value dozens of times now.