The European Central Bank finally boarded the quantitative easing bandwagon earlier this year to resuscitate the euro zone economy. From our perspective here at BankerBay, with our bird’s eye view on deal making around the globe, we are struck by the prompt market response to the ECB’s efforts, at least as measured in deal flow.
The European Central Bank finally boarded the quantitative easing bandwagon earlier this year to resuscitate the euro zone economy. From our perspective here at Aurigin (formerly BankerBay), with our bird’s eye view on deal making around the globe, we are struck by the prompt market response to the ECB’s efforts, at least as measured in deal flow.
Of course, the ECB came relatively late to the quantitative easing party, in contrast to the Federal Reserve and the Bank of England, which have been printing money and buying bonds on the secondary market, for the better part of the decade now. Instead, the ECB resorted to injecting billions of euros into the monetary system through its long-term refinancing operations to spur lending and even cut its deposit rate, the interest rate paid to banks for parking cash with the ECB, below zero, which in effect is a penalty for leaving money with the central bank. ECB officials have said the long-term cheap loans (TLTROs) given to banks had translated into more than 100 billion euros ($110 billion) of credit to companies. But as if to make up for lost time, this year the ECB came out guns blazing and since March the ECB is spending 60 billion euros ($65 billion) each month on large scale bond purchases from the secondary market through its QE program.
Indeed, the program has been fairly successful and one of the most profound effects has been a weaker currency. The euro has weakened around 14 percent compared with the same time last year after trading as low as $1.04 to the U.S. dollar earlier this year. A euro was worth $1.08 earlier on Friday, compared with $1.24 the same time last year. See graph below.
But, how does that affect investments in Europe? Conventional wisdom suggests a weaker currency will entice investors from across the Atlantic as they need to spend a lesser number of dollars. Although the 19-member single currency bloc recovered somewhat strongly from the depths of the financial crisis in 2009, the euro zone debt crisis has continued to batter economic growth and in turn hammered investor confidence. However, the crisis has encouraged Europe to implement reforms, and these are already paying dividends in reducing public debt, improving governance and labour market flexibility. In addition, emerging markets China, India and Brazil might have shown stronger macro-economic growth through the downturn since 2008, they too face economic headwinds and governance challenges. All these factors put together, make Europe an attractive destination for investors.
Indeed, Aurigin data shows a steady increase in the number of investors looking to allocate funds in European countries. In March alone, when the ECB announced its bond purchase program, the number of companies seeking to invest in Europe almost doubled compared with the previous month. And that number went even higher in April.
Since then the ECB has considered fresh policy steps, including a possible cut to its already negative deposit rate and is set to make a decision on the matter at its next meeting in early December, according to the central bank’s statement after its October meeting. That drove another flock of investors to look for deals in Europe. Aurigin data showed the number of providers of capital, project funds and acquirers almost tripled in October compared with new deals in September. And with the ECB vying to do all it takes to breathe life into the euro zone economy, including an increase to its monthly bond purchases, Aurigin will be tracking the middle market investment trend in Europe closely. Keep watching the activity and we’ll highlight more emerging themes in our publications on Aurigin.