Slovakia to benefit from quantitative easing (Slovak Spectator)

Portál Slovak Spectator cituje dňa 29.1.2015 Martina Vlachynského v téme kvantitatívneho uvoľňovania.

Policy supports exporters and lowers the cost of servicing state debt.

THE EUROPEAN Central Bank (ECB) has launched a bond-buying programme which will pump hundreds of billions into the eurozone economy. While the main aim is to revive economic growth by cheapening European exports on the global market and help ward off deflation, Slovak exporters look set to benefit from the weaker euro and does the state through cheaper debt servicing.

The ECB said it would purchase sovereign debt from this March until the end of September 2016. Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing (QE) programme will release €60 billion a month into the economy, ECB President Mario Draghi said, as cited by Reuters.

This way the National Bank of Slovakia (NBS) should get roughly €400 million monthly and thus during the whole 18-month scheme more than €7 billion. The task of Slovakia’s central bank will be to buy state bonds from commercial banks. These are considered to be a safe investment and thus if banks sell them to the NBS, they will instead invest money somewhere else, freeing up cash for companies. mortgages or consumer loans, the Sme daily wrote.

Europe’s quantitative easing is based on two hopes, Martin Vlachynský, an analyst with the non-governmental think tank Institute of Economic and Social Studies (INESS), told The Slovak Spectator. One is that results will be similar to those in the United States and not Japan. Officially the quantitative easing has only one goal and this is to increase inflation to 2 percent.

While Vlachynský believes that this goal is achievable, he sees problems of the Europe’s economy elsewhere – in an inability to curb public expenditures based on unrealistic expectations and necessity to increase competitiveness of the Europe’s economy.

Jana Glasová, analyst with Poštová Banka, explains that purchases of state bonds by central banks can be seen as a kind of pumping money into economy with a result of a higher liquidity on the market. 

“Higher liquidity in the eurozone may on one hand again push down market interest rates and on the other hand it may increase inflation expectations,” Glasová wrote in the bank’s material.  

Another QE’s effect will be a drop in yields of state bonds for affected countries.

“As a consequence of quantitative easing demand for government bonds would increase and this would push their yields down and bring reduction of costs of state debt servicing for affected countries,” Glasová wrote, adding that Slovakia has been already enjoying lower yields required by investors while this may continue into some period of time.

The third QE’s effect will be continuation of weakening of the euro.

“The weaker euro helps meet main aims of the ECB and this is the revival of the economic growth and the fight against deflation,” Glasová wrote. “Weakening of the euro helps exporters exporting their products into countries outside the eurozone because there their production becomes cheaper and thus also more attractive for clients.”

Glasová added that on the other hand, the weaker local currency make imported goods more expensive and this way the country also ‘imports’ inflation, which is welcomed by the ECB.     

QE will also keep interest rates low and while rates on time deposits are now lower than two or three years ago, this does not mean that it does not make sense to save money. The opposite is true.

“Prices in Slovakia have not grown over the last year, what means that the inflation has not cutting us from rates anything and thus bank deposits really earn us,” said Glasová, adding that the average interest rate on a new term deposit up to one year was as high as 2.3 percent in January 2012. But the inflation was as high as 3.6 percent, what means that after cleaned from impacts of inflation, savings did not earn.

Today’s situation is more favourable for savers.

“Even though the interest rates at one-year time deposits are lower, the inflation does not cut anything from interest rates and savings are earning,” said Glasová.

Slovak Spectator, 29.1.2015