| One of the market’s least-well-kept secrets is that the European Central Bank is readying a plan to buy private debt in the secondary market. After ECB president Jean-Claude Trichet failed to deny such a plan at the European Parliament economic committee on Monday, expectations are growing that the move could be announced as early as tomorrow, April 2. If the ECB does usher in quantitative easing it will be following in the footsteps of the UK, US, Switzerland and Japan, but would face political pressures that are unique to the eurozone.
One of the most obvious political problems it faces is that each individual country issues its own euro-denominated sovereign debt and at rates that infer credit differentiation; so which sovereign bonds should the ECB purchase? This problem is likely to be dodged, initially at least, by limiting purchases to corporates’ debt. But the relative size of corporate debt markets varies across the region as well, so countries with a large volume of outstanding corporate debt securities (such as France, with 41% of the euro area total) could lose out relative to those with smaller corporate debt markets (such as Spain, with 2.5% of euro area total). Euromoney asks four economists for their views on the likely impact of the ECB moving to a form of quantitative easing.
Gary Jenkins, head of fixed-income research, Evolution Securities
“If the ECB goes down the
route of only buying high-
quality corporate bonds,
then they are just joining
in the great bond chase of
2009 and will not be doing
anything to help the
companies that need help,
or the wider economy.” |
The key as to whether this approach [buying corporate bonds] actually improves financing opportunities for corporates really depends upon what kind of credits the ECB purchases. At the current time, there is in many ways a two-tiered market for corporates. There are the highly rated quality companies that are issuing bonds globally in record amounts, and which have no problems whatsoever in accessing the markets for liquidity. Then there are the stressed areas of the bond market, which include the high-yield market and the subordinated bonds issued by financial institutions. To this we can add the lowly rated triple-B bonds, which are expected by the market to cross over into junk space within the next 18 months. This segment of the market is so stressed that from an issuance standpoint they are almost closed for business at the current time. If the ECB were to target these kinds of companies, then it might be that they could encourage other investors to start to look more closely at these areas and it might lead to the taps being turned back on for the great unloved of the corporate bond market. If, however, the ECB goes down the route of only buying high-quality corporate bonds, then they are just joining in the great bond chase of 2009 and will not be doing anything to help the companies that need help, or the wider economy.
Julian Callow, chief European economist, Barclays Capital
“In my view it is not yet
necessary to undertake
this operation... There is
plenty of money-printing
going on by the ECB as
it is.”
| Right now there is still scope to do more in terms of additional forms of conventional monetary stimulus. So in my view it is not yet necessary to undertake this operation. Moreover, such measures are really fiscal policy and therefore better addressed within a fiscal framework. If the ECB felt there was insufficient monetary expansion, then it might need to resort to asset purchases, then it should do so by buying government bonds as well as corporate paper. But with the annual growth rate for banknotes in circulation rising by 13.5%, and the narrow money aggregate M1 rising by 6.2% in February, it seems there is plenty of money-printing going on by the ECB as it is.
Silvio Peruzzi, euro area economist, RBS
“We think this is a
needed step
because the
predominance of the
banking sector as a
source of funding
could bring the
entire economy to a
halt should banks stop
funding to the private
sector.” | A potential purchase programme of private debt would improve liquidity in the secondary market and reduce the cost of funding of the real economy. This would certainly be helpful to spur a recovery in my view. The ECB has made clear that the euro area, as a bank-centric system, is very different from the US or the UK. By buying private debt the central bank would virtually bypass the banking system, thus acknowledging its dysfunctional status. We think this is a needed step because the predominance of the banking sector as a source of funding could bring the entire economy to a halt should banks stop funding to the private sector.
I think this is a good measure although we have to bear in mind that the outstanding amount of euro-denominated debt securities in the euro area (including money market paper), amounted to €602 billion in January or about 6.5% of euro area GDP and it is relatively small as a source of private sector financing. Corporates rely for more than 70% of their funding on bank loans and the access to capital markets is very limited compared with the US or UK. This casts some doubts on the effectiveness of this measure, alone, to ease funding costs for the private sector. It certainly is a move that will help, but I think that there is a chance the ECB will have to come up with bolder steps in the future.
Ken Wattret, chief eurozone market economist, BNP Paribas
“We would welcome the
ECB following the SNB,
BoJ, BoE and Fed down
the quantitative easing
route but we expect it to
try other measures first,
probably focusing on the
banking channel.” |
The ECB will soon run out of conventional policy runway so an expansion of the range of unconventional policy measures will be required in the near future. Exactly how, and when, this is done is difficult to call but recent experience elsewhere suggests we should expect radical central bank action sooner rather than later. The rise in the euro exchange rate since the Fed's move to quantitative easing represents a further tightening of monetary and financial conditions in the eurozone, exactly the opposite of what the ECB is attempting to achieve. This reinforces the case for the ECB to cut its key rates again at the first opportunity. More needs to be done, however. We would welcome the ECB following the SNB, BoJ, BoE and Fed down the quantitative easing route but we expect the ECB to try other measures first, probably focusing on the banking channel in line with the thrust of recent speeches. Ultimately we believe that the ECB will join the quantitative-easing club, probably in the summer of this year once it becomes clear that inflation expectations are not as well anchored as the ECB currently believes. We continue to believe that the ECB is underestimating the risk of a deflationary outcome in the eurozone. |
