By Sarfaraz A. Khan, Research Asst. Iffat Zehra
Last week, as expected, the European Central Bank launched its Quantitative Easing, or QE, program to lift the sluggish euro-zone economy and avert the threat of a deflationary spiral. The ECB is going to pump more than 1.1 trillion euros, or $1.25 trillion, into the financial markets by buying largely euro-zone government bonds of 60 billion euros, or $68 billion, in each month beginning from March for at least the following 18 months, until the inflation rate starts rising to the target of just below 2%. In other words, the QE program will continue until the eurozone starts to post sustained economic growth.
The bonds will be purchased on the basis of "capital key," which refers to the relative size of the economy in the larger eurozone. The risk of losses in the event of a default will be shared by the ECB and the national central banks for 20% of the purchases. The latter will bear the risks related to the remaining 80% of the purchases, which will require a sovereign guarantee for losses.