ECB To Buy Bonds and Asset-backed Securities

Despite recently reported better-than-expected economic data, analysts are predicting that the euro zone is in danger of its third recession since 2008. After experiencing two recessions in quick succession, one in 2009 and a double dip recession in 2012-2013, the euro area is on the cusp of another one in the very near future.

In an article in the London Guardian published Sunday, November 16th after attending the G20 gathering of international leaders in Brisbane, Australia, UK Prime Minister David Cameron warned that the “eurozone is teetering on the brink of a possible third recession, with high unemployment, falling growth and the real risk of falling prices too.” In addition, he said, the “UK was already feeling the impact of the euro zone slowdown on our manufacturing and [UK] exports.”

Cameron’s dire prediction contradicts recent economic information published by Eurostat which revealed that the euro zone economy grew by 0.2 percent in the third quarter of 2014. This growth is only slightly below the 0.3 percent across the 28-country bloc with zero growth in the three months between April and June.Cameron said there was a “dangerous backdrop of instability and uncertainty, with diplomatic, humanitarian and economic problems around the world,” which potentially could put the UK’s recovery at risk. He referred to slowing growth in emerging markets, delayed trade talks, the Ebola epidemic, conflicts in the Middle East and Russia’s actions in Ukraine as other problems facing the global economy.

British Economy

The British economy, however, has shown to be the fastest-growing in the G7, with “record numbers of new businesses, the largest ever annual fall in unemployment, and employment up 1.75 million in four years,” said Cameron. “But the reality is, in our interconnected world, wider problems in the global economy pose a real risk to our recovery at home.”

Cameron’s words echo the truth about what is happening throughout the other countries in the euro zone. In Germany, for example, exports have been dropping at their fastest rate since the global crisis in 2009. The country’s five largest economic institutions have cut their growth forecast for Germany from 2pc to 1.2pc for 2015, cautioning that the latest measures revealed by the European Central Bank will add “hardly any” extra stimulus to the real economy and may in fact be ineffectual.

Germany and France, the eurozone’s two largest economies, have shown slow-moving growth so far this year, while Italy has already fallen back into a recession. In total, the currency bloc is expected to expand by a mere 0.8 percent this year followed by only 1.1 percent in 2015.

In the meantime, the US and the UK have performed much stronger over the past twelve months, expanding by between 2 and 3 percent.

According to Jean-Michel Six, Standard & Poor’s chief EMEA economist, “Risks of a triple-dip recession (in the euro zone) have risen.” But he continues, “We will probably avoid a triple-dip recession, but it will be a near-miss.”

To avoid a possible triple-dip recession, Six believes that the European Central Bank (ECB) must follow through with its initiative to purchase sovereign bonds to help stimulate more bank lending and business activity.The ECB has already announced plans to purchase covered bonds and asset-backed securities (ABS), but the bank must go even further and buy sovereign bondsin the style of the U.S. Federal Reserve, the Bank of England and the Bank of Japan.

The new ECB program is one aspect of the strategy initiated by ECB chief Mario Draghi which he hopes will increase the bank balance sheet by up to 1 trillion euros. It already buys covered bonds, a secure form of debt often backed by property.

The ABS and covered bond programs is scheduled to continue for at least two years and the ECB will post a weekly update on its purchases on its website around 1430 GMT on Mondays, as it is already doing with the covered bond purchases.In an effort to limit the risk, the ECB will buy only the most secure parts of the loans.

Economist Six is not totally pessimistic about the situation and says that the euro zone is likely to avoid recession in 2015 and early 2016, boosted by the decline in oil prices, of which Europe is a net importer. “Around 10 euros ($12.5) per full tank is being saved when we fill up our cars, thanks to falling oil prices,” Six said.

Michael Coren is a contributing editor for FXacademy and a freelance writer for several financial publications.