The European Central Bank must act sooner rather than later in order to avoid a grave outcome for the euro area and possibly the euro itself, according to Credit Suisse Economist Yiagos Alexopoulos.
“The deterioration in liquidity and pricing in euro area government bond markets means an aggressive policy response is urgently needed,” Alexopoulos wrote in a research note.
Liquidity needs to be in place by the time major euro zone governments begin heavy issuance in early 2012 according to Alexopoulos, who believes only the ECB can achieve this outcome via “a large-scale asset purchase program of quantitative easing.”
This would mean the ECB buying up huge amounts of euro zone debt in the secondary market, something Alexopoulos thinks would be justifiable under the current “Treaty if it was undertaken for monetary policy purposes.”
1 trillion euros ($1.33 trillion) would be needed for the program to achieve the required results according to Alexopoulos who believes those with lower debt to gross domestic product ratios would be the biggest winners.
“An ECB QE program would reduce the safe haven premium in bunds. Thus, we expect a bold move from the ECB to result in higher German yields and core curve steepening,” he wrote.
This and the fear of inflation lay at the heart of Germany’s opposition to such a move but there would be winners, according to Alexopoulos.
“In terms of the periphery, the main beneficiaries are countries with relatively lower debt-to-GDP ratios. We expect Spain to outperform versus Italy and Belgium,” he said.