The ECB’s expansionary monetary policy is now going to primarily benefit the most troubled countries

We believe that the ECB’s even more expansionary monetary policy is now going to primarily benefit the countries facing the greatest problems with their public debt (Italy, Greece), for three reasons: It can no longer do much to drive down interest rates on core euro-zone bonds, which have stopped falling at the level of the rate on banks’ deposits at the central bank; It will do more to improve fiscal solvency for countries whose fiscal solvency is weak than those whose fiscal solvency is already strong; It will drive investors to seek the higher yields on peripheral country bonds, since interest rates on core bonds have become very low. A more expansionary monetary policy from the ECB should therefore be expected to reduce the long-term yield spread between the troubled and the core euro-zone countries.