Free songs

net issuance

ECB QE Amount came Above Expectations with Low Risk Sharing and Legal Headwinds

The ECB unveiled a bigger than expected QE plan that will involve buying €60B a month including government bonds, covered bonds and ABS but excluding corporate bonds. The program scheme will begin in March and last until the end of September 2016; or “until the ECB sees a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent”. Therefore, it implies at least €1140B of purchases (19 x 60) so that the ECB balance sheet will exceed its 2012 top level in Sept. 2016 (previously than investors expected).

 

 

 

Assuming €10B a month of  ["covered bonds" + "ABS"] purchases, it implies €50B/ a month of sovereign bonds. In other words, in 2015, sovereign purchases should reach €500B which is almost 56% of Eurozone gross issuance and 2.3 times the net issuance. Through September 2016, the total amount of sovereign purchases would rise to €950B and will be based on the Eurosystem NCBs’ shares in the ECB’s capital key (and won’t exclude Greece).  Note that for Germany, the table shows that purchases through the end of 2015 will reach €129B which is more than 20 times the amount of the net issuance scheduled for 2015.

 

 

Moreover, the maturities of sovereign bonds purchased will range between two and 30 years and could offer negative yield.

 

However, after strong pressure from German and Dutch officials, national central banks will assume most of losses from any default or restructuring of their national debt, breaking with the tradition set by previous sovereign bond-buying schemes. There will be risk-sharing on only 20% of the assets, largely debt issued by European institutions bought by national central banks.

 

Finally, also on the negative side, the ECB QE is already facing legal headwinds in a context where the FT reported that:

 

Peter Gauweiler, a conservative MP who has launched multiple legal actions against the common currency, announced on Thursday that he had instructed a law professor to prepare a case against the QE programme.”

While government ministers refrained from comment, Werner Langen, a leading European Parliament member of Chancellor Angela Merkel’s conservative CDU, went on morning television to attack QE, saying: “This is wrong, it does not help, it is not the right instrument [ to aid economic recovery]. The ECB has reached the end with its monetary policy.”

 

Moreover, within minutes of Draghi’s announcement, deputy chancellor Hans Michelbach asserted that the ECB was “violating its mandate” while several hours later, Ifo economic institute President Hans-Werner Sinn says ECB’s bond-buying decision is “illegal and unsound state financing through the money-printing press.”

 

All in all, Draghi reassured investors by choosing both a monthly and a total amount above the consensus, including Greece and a large choice of maturities. Separately, in order to ease pressure from German and Dutch officials, he decided to cap risk-sharing on only 20% of the assets. However, it’s clear that it’s not sufficient and the QE is far from being implemented.

Deutsche Bank estimates Eurozone Bond Issuance Will Fall in 2015

According to Deutsche Bank calculations, Net eurozone sovereign bond sales are set to fall by almost 14% in 2015 to €221.2B.  Over the same period, Gross issuance is expected to decrease by 1.3% to €893.2B.

 

It means that if ECB launches a QE of €500B this year, it will represent 62% of gross issuance and more than two times as much as the net issuance.