ECB wins first battle but long war ahead

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It could only be a chart on the ECB’s announced QE program and hopefully the table below clarifies who will be buying what kinds of assets and in what size.

The initial market reaction – a fall in eurozone yields and euro and a jump in equities – suggests that the announcement has surpassed expectations – expectations which had admittedly been massaged over recent weeks.

The headline size of bond purchases – about EUR 1.14trn – was larger than expected and could be even larger if inflation fails to rise towards the ECB’s 2% target. Furthermore, there will be a degree of loss sharing, partly shoring up the ECB’s credibility as a team player. But purchases of government bonds will “only” amount to about EUR 836bn, which equates to about 14% of total outstanding eurozone government debt according to my estimates. That’s quite a bit lower than the 22-23% of debt purchased by the US Fed and Bank of England.

Ultimately, these numbers can be sliced and diced ad infinitum. The real question remains whether a weaker euro boosts exports, banks use their freed-up balance sheets to lend and households and businesses take advantage of cheaper and more plentiful lending to borrow, spend and invest. The ECB will only be able to claim total victory if QE is accredited with creating jobs and lifting growth and inflation from current lacklustre levels. The jury will be out for at least a few months, in my view.

Finally, a number of commentators have criticised QE for exacerbating social inequalities. But asking QE to quell systemic risk, boost growth AND reduce inequality is simply unrealistic for what I still ultimately regard as a measure of last resort. Reducing inequality is arguably the preserve of government and elected officials, not central bankers.

olivier desbarres COTW

Figure 1: Who will buy what, in what amounts and loss-sharing

Notes

(1)  This figure is derived by subtracting estimated purchases of ABS and covered bonds (EUR 190bn) and agency and supranational bonds (EUR 114bn) from total of EUR 1.14trn; it equates to about 14% of current outstanding eurozone government debt and compares to about 22-23% of debt purchased by US Fed and Bank of England.

(2)  Draghi said the current pace of purchases of ABS and covered bonds, about EUR 30bn in Q4 2014, was a good guide for future purchases – i.e. about EUR 10bn/month. That leaves about EUR 950bn for other debt purchases.

(3)  Draghi said the purchases of European Institutions’ debt would amount to 12% of additional purchases (EUR 950bn) or about EUR 114bn.

(4)  Debt issued by European Investment Bank (EIB) will account for about EUR 100bn.

(5)  8% of additional bond-buying (EUR 950bn) equals about EUR 76bn.

(6)  National central banks will be able to buy bonds issued by their own country and other eurozone countries.

(7)  This figure is derived by subtracting EUR 76bn (amount of government bonds ECB will purchase) from EUR 836bn (total amount of government bonds that will be purchased).

(8)  Government debt with a maturity of 2-30 yrs can be purchased from secondary market.

(9)  In the event of a sovereign restructuring or default, public and private bondholders would be treated on equal terms.

(10)  A maximum of 33.3% of a country’s debt can be purchased and a maximum of 20% of a specific issue can be purchased.

(11)  EUR 60bn/month for 19 months (March 2015 to September 2016) equals EUR 1.14trn.

 


 

Sources

Fig 1 – European Central Bank, www.olivierdesbarres.co.uk

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