The European Central Bank’s (ECB) money-printing programme risks causing significant damage to stock markets, Wall Street analysts have warned new president Christine Lagarde.
The message of caution came as the ECB restarted its “quantitative easing” (QE) programme on 1 November, through which it digitally creates money which is then used to buy government and corporate bonds.
Restarting the controversial policy has caused a rift at the ECB’s highest ranks, with one German policymaker quitting the board in protest. Many northern European governments say the policies punish savers and keep “zombie” business alive.
Now, Bank of America Merrill Lynch (BoAML) has warned that prolonged QE will mean companies will turn to debt, rather than issuing stocks, for their funding needs.
“What seems a given is that credit markets will experience another bout of rapid expansion, coaxed on by the proliferation of negative yields,” BoAML strategist Barnaby Martin in a note seen by The Telegraph.
Quantitative easing has pushed borrowing costs to record lows by driving down the yields – which move inversely to prices – of government bonds. This allows companies to borrow extremely cheaply.
BoAML’s note addressed growing fears over the decline of stock markets such as the London Stock Exchange (LSE). By the end of September, London had hosted just 25 share offerings compared with 55 over the whole of 2018.
In the European Union, the number of listed companies has fallen by around a quarter over the last decade.
Fewer listings mean the number of companies releasing detailed results would drop, giving investors “a less reliable pulse on the economy,” BoAML said.
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