The ECB’s decision last Thursday to implement Q€ wasn’t a surprise. Nevertheless, the details of the plan as presented by ECB President Mario Draghi in his follow-up press conference provided some shock-and-awe to global financial markets. Let’s review the key elements of the program:
(1) Bigger size. Before the meeting of the ECB’s Governing Council on Thursday, the financial press was full of stories reporting that unnamed sources said that bond purchases would be €50 billion per month. Draghi said the purchases would be €60 billion per month starting in March through the end of September 2016. That would add €1.1 trillion to the ECB’s balance sheet over that period. Draghi said that this purchase program includes the existing one for asset-backed securities and covered bonds, which is around €10 billion per month.
(2) Open-ended. The big surprise was that the program might continue beyond September 2016. Draghi said that the purchases “will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”
(3) Long bonds. As noted above, Draghi said that the maturities of the bonds purchased by the ECB would be between two years and 30 years. That certainly exposes the central bank to some risk if it succeeds in boosting inflation back to 2%, since yields would rise in that scenario. No one asked Draghi about that at the press conference.
(4) Risk sharing. The bulk of the bond purchases will be by the national central banks (NCBs) under the direction of the ECB. The NCBs and ECB will share any losses attributable to the securities of European institutions, which will account for 12% of Q€ assets. The same goes for an additional 8% of additional assets that will be held by the ECB. According to the press release: “This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.” In other words, the NCBs will be at risk on their own for 80% of the assets purchased under the program. That shows the contortions that were necessary to get the deal done.
(5) Immaculate conception. Incredibly, notwithstanding the historic significance of the ECB’s Q€ and the ongoing controversy about it, particularly in Germany, the Governing Council adopted it without a formal vote. Draghi said that “there was a large majority on the need to trigger it now, and so large that we didn’t need to take a vote.” In other words, none of the members wanted to be on the record as having voted for it! Indeed, there was “a good discussion” on whether it needed to be implemented right away.
(6) Greasing Greece. Draghi was asked whether or not the ECB will purchase Greek debt. He responded as follows: “We don't have any special rule for Greece. We have basically rules that apply to everybody. There are obviously some conditions before we can buy Greek bonds. As you know, there is a waiver that has to remain in place, has to be a program. And then there is this 33% issuer limit, which means that, if all the other conditions are in place, we could buy bonds in, I believe, July, because by then there will be some large redemptions of SMP bonds and therefore we would be within the limit.”
In Sunday’s election, Alexis Tsipras’s Coalition of the Radical Left, known by its Greek acronym of “Syriza,” took 36.5% of the vote compared with 27.7% for Prime Minister Antonis Samaras’s New Democracy, according to official projections. Campaigning on an anti-austerity program, Tsipras pledged to negotiate a write-down of Greek debt and to abandon budget constraints that were imposed in return for aid. Samaras warned that would risk Greece’s exit from the Eurozone.
The return of Grexit fears could increase financial stress in the region again, and offset whatever stimulative impact Q€ might have. On the other hand, it could send the euro down faster to parity with the dollar.
The big question, of course, is will Q€ work, barring a Grexit? It’s possible, though not very likely, in my view. The Eurozone’s economy has been stagnating since 2011. Interest rates had already fallen sharply since Draghi’s whatever-it-takes sermon on July 26, 2012. It’s not obvious how Q€ will boost bank lending, which is a much more important source of funds for borrowers than the capital markets in the Eurozone. However, the sharp drop in the euro only started last summer, and it might lift Eurozone exports.
(1) Bigger size. Before the meeting of the ECB’s Governing Council on Thursday, the financial press was full of stories reporting that unnamed sources said that bond purchases would be €50 billion per month. Draghi said the purchases would be €60 billion per month starting in March through the end of September 2016. That would add €1.1 trillion to the ECB’s balance sheet over that period. Draghi said that this purchase program includes the existing one for asset-backed securities and covered bonds, which is around €10 billion per month.
(2) Open-ended. The big surprise was that the program might continue beyond September 2016. Draghi said that the purchases “will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”
(3) Long bonds. As noted above, Draghi said that the maturities of the bonds purchased by the ECB would be between two years and 30 years. That certainly exposes the central bank to some risk if it succeeds in boosting inflation back to 2%, since yields would rise in that scenario. No one asked Draghi about that at the press conference.
(4) Risk sharing. The bulk of the bond purchases will be by the national central banks (NCBs) under the direction of the ECB. The NCBs and ECB will share any losses attributable to the securities of European institutions, which will account for 12% of Q€ assets. The same goes for an additional 8% of additional assets that will be held by the ECB. According to the press release: “This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.” In other words, the NCBs will be at risk on their own for 80% of the assets purchased under the program. That shows the contortions that were necessary to get the deal done.
(5) Immaculate conception. Incredibly, notwithstanding the historic significance of the ECB’s Q€ and the ongoing controversy about it, particularly in Germany, the Governing Council adopted it without a formal vote. Draghi said that “there was a large majority on the need to trigger it now, and so large that we didn’t need to take a vote.” In other words, none of the members wanted to be on the record as having voted for it! Indeed, there was “a good discussion” on whether it needed to be implemented right away.
(6) Greasing Greece. Draghi was asked whether or not the ECB will purchase Greek debt. He responded as follows: “We don't have any special rule for Greece. We have basically rules that apply to everybody. There are obviously some conditions before we can buy Greek bonds. As you know, there is a waiver that has to remain in place, has to be a program. And then there is this 33% issuer limit, which means that, if all the other conditions are in place, we could buy bonds in, I believe, July, because by then there will be some large redemptions of SMP bonds and therefore we would be within the limit.”
In Sunday’s election, Alexis Tsipras’s Coalition of the Radical Left, known by its Greek acronym of “Syriza,” took 36.5% of the vote compared with 27.7% for Prime Minister Antonis Samaras’s New Democracy, according to official projections. Campaigning on an anti-austerity program, Tsipras pledged to negotiate a write-down of Greek debt and to abandon budget constraints that were imposed in return for aid. Samaras warned that would risk Greece’s exit from the Eurozone.
The return of Grexit fears could increase financial stress in the region again, and offset whatever stimulative impact Q€ might have. On the other hand, it could send the euro down faster to parity with the dollar.
The big question, of course, is will Q€ work, barring a Grexit? It’s possible, though not very likely, in my view. The Eurozone’s economy has been stagnating since 2011. Interest rates had already fallen sharply since Draghi’s whatever-it-takes sermon on July 26, 2012. It’s not obvious how Q€ will boost bank lending, which is a much more important source of funds for borrowers than the capital markets in the Eurozone. However, the sharp drop in the euro only started last summer, and it might lift Eurozone exports.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.