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The European Central Bank (ECB) predictably capitulated on July 21, 2022. A potentially unlimited Quantitative Easing (QE) has been announced. Before the previous QE ends, the ECB will continue its crazy monetary experiments.
How Does the ECB Fight Inflation?
This is worth explaining. The ECB has announced a new Transmission Protection Instrument (TPI). It’s a transmission protection tool. In the description of TPI, the ECB writes that the tool was introduced to counter the unreasonable erratic market movements that took place in mid-June when the European market collapsed.
Its essence is that the ECB can buy securities on the secondary market for securities allocated in European jurisdictions where financial conditions are discovered, and an unjustified fundamental factor of each particular country is identified.
The scale of TPI purchases involves significant risks, and purchases are not limited in any way. In other words, when financial conditions destabilize, there will be buying until rates and interest spread normalize.
TPI purchases will focus on public sector securities with remaining maturities of one to ten years. Marketable debt securities are issued by central and regional governments and agencies, as defined by the ECB. If necessary, consider purchasing private sector securities.
The Board of Governors buys securities under a number of conditions, for example:
- Compliance with the EU fiscal system:
- no excessive shortage procedures;
- no serious macroeconomic imbalance;
- fiscal implications: in setting the trajectory of the sustainability of public administration;
- prudent and sustainable macroeconomic policy within the scope of the commission.
But these are formal procedures. In reality, purchases occur wherever they break through, regardless of budgetary policy, the amount of debt, and so on.
TPI purchases will evolve in such a way that they do not lead to regular review of the overall balance sheet of the Eurosystem and hence on monetary policy.
Difference Between QE and TPI
The difference between Quantitative Easing and TPI is that in the second case, purchases will be made only when the parameters of the financial system go beyond the red line set by the ECB. The materials of the statement do not say what kind of “red line” it is and what levels private purchases refer to, which is logical. Judging by the press release and the statement from the officials, this covers the parameter. It all depends on market conditions, changes in volatility, and speed parameters.
The priority direction is the reinvestment of securities from “strong participants” to the purchase of securities of “weak participants”. However, the news is that the ECB is allowing for an increase in the balance sheet if the pace of reinvestment is not enough to stabilize the market.
Degradation cannot be localized on one thing. Usually, degradation captures the entire object. Europe is moving at full speed into the worst debt crisis in its history, which, like a black hole, will absorb previously healthy parts of the system. This is a wonderful way they are trying to beat inflation.