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IMF warns against premature ECB-tightening

The International Monetary Fund has warned against the effects of reining back asset purchases by the European Central Bank, as the ‘Draghi put’ sees its fifth anniversary.


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In a report on the economic health of the eurozone, the IMF hailed the strengthening recovery in the eurozone, but noted that “a number of euro area countries—not least Greece, Italy, and Portugal”, still run deficits and have high public debt.

“These countries have limited buffers to cushion against economic shocks, and could face higher borrowing costs when the current monetary stimulus is gradually reduced, through lower bond purchases by the European Central Bank, for example. These countries need to rebuild buffers now and put their public debt-to-GDP ratios solidly on a downward path,” the IMF warned.

Draghi success

The report comes exactly five years after ECB-president Mario Draghi made his famous ‘whatever it takes’ speech, promising to do anything in his ability to save the euro. And his policies have been a tremendous success, said Stefan Isaacs, deputy head of retail fixed income at M&G Investments, noting that borrowing costs for peripheral eurozone countries have dropped dramatically over the past five years, while economic growth “improved markedly.”

“Despite all the speculation, no country has left the Eurozone and markets currently appear much less concerned. This is perhaps the single most important measure upon which to judge the effectiveness of ECB policy,” he said.

While reduced borrowing costs for governments and corporates and increasing asset prices were the primary effects of the ECB’s rate-cutting, its provision of cheap funds to eurozone banks and of course its asset purchasing programme has ultimately lead to a broader economic recovery in the eurozone.

“All euro area members are sharing in the recovery now, with the differences in growth rates across countries at their lowest level since the launch of the euro in 1999,” the IMF noted, stopping short of crediting their ECB colleagues with this achievement.

But asset managers have no such reservations.

“Ultra-loose monetary policy penalised saving, reduced debt servicing costs and encouraged investors to take on risk. This has served as a backdrop for improved consumer sentiment, higher asset prices and a pick-up in consumption,” said M&G’s Isaacs.

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