Eurozone to face ECB taper risks - TDS

Research Team at TDS expects the ECB to taper its bond purchases in 2017, and Eurozone bond yields—peripheral and corporate spreads in particular—will require careful monitoring compared with the recent past.

Key Quotes

“The ECB’s asset purchases have been crucial in keeping long-simmering financial tensions from rising to the surface. Peripheral spreads have benefited, regardless of politics or deficits.”

“We expect some purchases to continue right through 2017 at least. That said, the ECB’s tapering process leaves EGBs considerably more vulnerable than they were before, and the EZ more prone to a return of financial fragmentation. If there are flare -ups in peripheral spreads, the ECB has the option of pausing the program to limit the risk of monetary policy transmission failure. We will be monitoring closely to gauge how quickly the ECB is able to taper.”

“The risk is that the ECB’s modalities of tapering, while primarily driven by significant progress on closing the output gap and improving GDP and inflation prospects, are also in part driven by a scarcity of assets to purchase at the current pace. We cannot rule out significant flare-ups in Eurozone political tensions leading to political tensions within the ECB itself.”