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ECB PREVIEW: Sovereign QE Imminent; Size, Risk-Sharing in Focus – Bloomberg

Bloomberg made a review of economists’ views ahead of the ECB meeting:


Morgan Stanley
- Expect ECB to embark on sovereign QE and announce government bond purchases of EU500b and private sector asset purchases of EU100b, economists including Elga Bartsch say in Jan. 19 note.
- A negative deposit rate makes it difficult for ECB to meet its target merely through funding facilities as it effectively introduces a tax on excess bank reserves.
- Difficult for ECB to raise deposit rate to zero without raising the refi rate at the same time
Workable compromise for ECB would be a hybrid program with a core component where financial risk is shared across Eurosystem and an optional component relating to national central bank risk.
- Remain skeptical on QE impact because of dissent inside the ECB, potential political backlash, legal uncertainties on government bond buying.

- Expect ECB to announce government bond buying of between EU500b and EU700b over 18 months, analysts incl. Athanasios Vamvakidis, Gilles Moec, write in Jan. 16 client note.
- Program likely to include all investment grade govt bonds, with monthly or quarterly pace for purchases; mutualization likely, ECB would retain considerable discretion on details of purchases.
- Crucial issue is if ECB manages to create “open ended” feel; communication will be key for market reaction.


- Expect ECB to announce expansion of asset-purchase program to include govt bonds this week: technicalities will likely be announced in March, strategists including Nikolaos Sgouropoulos say in client note dated Jan. 18.
- Central bank may signal program will stay open until CPI expectations are firmly re-anchored.
- Any QE without shared risk may be counter-productive, analysts including Giuseppe Maraffino write in separate note.

Deutsche Bank
- ECJ’s opinion on OMT last week makes it easier for ECB to act sooner and reduces risk of too much compromise on program’s design, economist Mark Wall write in client note dated Jan. 16.
- Even if central bank waits until March, Draghi has to send a clear signal on Jan. 22 of imminent QE; if vote on QE is in Jan., full details are only likely in March.
- Expect a broad-based asset purchase program encompassing investment grade corporate bonds as well as sovereign bonds, Wall writes in client note dated Jan. 9.
- No target size to be set for sovereign purchases; expects formal announcement of public QE from ECB on March 5.

Goldman Sachs
- Expect ECB to announce expansion of asset-purchase program on Thursday, with focus on sovereign debt and size of EU500b-EU1t, economist Dirk Schumacher writes in Jan. 13 note.
- Purchases to be mutualized and conducted according to capital key; degree of risk-sharing remains contested among GC members, so other modalities are possible.

JP Morgan
- ECB likely to announce EU500b sovereign-debt purchase plan, spread over coming year and with clear signal that it could be scaled up if needed, economist Greg Fuzesi writes in Jan. 16 note.
- Expect ECB to be pari passu to other bondholders and share credit risk on investment-grade bonds across national central banks; sub-IG risk to remain with national central banks.
- TLTROs to be made more attractive; ECB also likely to start buying non-financial corporate bonds.

- ECB is likely to announce a broadening of asset purchase program to include corporate and government bonds, economist Janet Henry says in Jan. 16 note.
- ECB may not announce magnitude of purchases; may stick with previous statement that it intends to expand balance sheet back to early-2012 levels.
- If size of eventual purchases is capped or degree of risk-sharing by national central banks is very limited, announcement could disappoint market expectations.

Credit Suisse
- Attach 70% probability to QE in form of sovereign bond purchases this wk, economists including Christel Aranda-Hassel says in client note dated Jan. 16.
- Expect ECB’s QE announcement to be accompanied by broad guidelines rather than all details; bond-buying should start before mid-Feb.
Base-case scenario, to which CS attaches odds of 50%: ECB announces EU500b-EU750b of sovereign, investment-grade bond purchases.
- Expect ECB to unveil “hybrid” bond-buying program in which some risks are taken by national central banks, strategists incl. Helen Haworth, write in Jan. 15 note.

- Expect ECB to announce QE this week; decision will probably be taken with comfortable majority, economist Guillaume Menuet says in client note dated Jan. 15.
- To maximize effectiveness, QE would need to be open-ended, fully mutualized, encompass all sovereign debt issuers irrespective of credit ratings and include instruments such as supranational issuers and inflation-linked bonds.
- ECB will probably be conservative because of the likely reluctance to pre-commit.
- Suspect inflation generated by QE may be limited, probably leading to another program like QE2 or QE3, possibly by mid-2016.

- ECB is likely to announce this week purchases of EU1t including sovereign debt, possibly augmented by corporate and supranational debt, economists including Reinhard Cluse write in Jan. 19 note.
- ECB will leave door open to do more should inflation fail to move back toward target within acceptable period of time.
- Unlikely for program to include Greek debt just 3 days before Greek election (on Jan. 25)
EUR may fall toward 1.10 USD if ECB QE exceeds expectations.

BNP Paribas
- ECB likely to announce sovereign QE on Thursday, economists inc. Ken Wattret write in Jan. 13 note
Expect deposit rate to remain at -20bps.
- Size of sovereign bond program will probably be ~EU600b per annum, with assets of longer maturity than under OMT and purchases unsterilized.
- Look for conditions to be attached, ruling out participation of Greece.

- ECB is likely to announce EU650b of govt bond purchases; EU650b is a conservative assumption; size could easily be EU1t for sovereigns, head of European rates strategy Andrew Roberts says in client note dated Jan. 19.
- Expect ECB to announce QE this week; program to include corporate bonds and securities issued by EIB as well as sovereign bonds, economist Richard Barwell says in Jan. 19 note.
- Expects no change in ECB interest rates in Jan. meeting.

Societe Generale
- Expects ECB to announce a new purchase program including corporates bonds, EU agencies and government bonds this week, economist Michel Martinez says in client note dated Jan. 16.
- Package will eventually include EU400b of private assets and EU500b-EU600b of sovereign bonds.
- A hybrid system could be contemplated, including part-mutualization based on capital key but with most purchases undertaken by NCBs at their own risk.
- Legal and political hurdles to risk-sharing will remain significant in coming months.

- ECB will probably announce on Thursday a large-scale asset purchase program, including govt bonds, economist Nick Matthews writes in Jan. 19 note.
- Expects ECB to broaden existing ABS and covered bond asset purchases to include corporate bonds, supras and agencies.
- ECB will probably detail monthly flow of public and private sector asset purchases of at least EU40b per month, for as long as necessary, conditional upon inflation outlook.

Credit Agricole
- Easiest way to surprise markets would be with a flexible program of at least EU500b, with more to come if needed, economist Frederik Ducrozet writes in client note dated Jan. 19.
- Expects ECB to commit to monthly pace of EU40b-EU50b of sovereign-bond purchases over 12 to 18 months, or an implied total amount of EU500b-EU700b.
- Sees combination of capital keys and caps on individual bond holdings, with an attempt to keep credit risk at national level.
- EU1t balance-sheet-expansion strategy could be boosted later this year should CPI outlook fail to improve.

ABN Amro
- Draghi will probably announce that ECB will embark on large-scale asset purchase program, mainly consisting of sovereign bonds, head of macro research Nick Kounis writes in Jan. 16 note.
- Program could also include other securities such as non-financial corporate bonds and agency debt.
- Purchases likely to be allocated according to capital key.

- ECB likely to announce broad-based sovereign QE on Thursday, economist Michael Schubert writes in Jan. 16 note.
- National central banks will likely have to buy up own countries’ bonds at own risk; this should ensure that new Greek govt would be cautious about advocating debt forgiveness, and could also result in greater support across Governing Council.
- Purchases likely to be in line with capital key; ECB likely to buy floaters and linkers to avoid market distortions; purchases probably won’t be limited to particular maturities.

- European Court of Justice aide’s opinion on legality of OMT program removed last roadblock to QE, economists inc. James Knightley write in Jan. 16 note.
- Central bank probably won’t present all details of likely program, postponing them to March meeting.

- ECB probably has QE package in pipeline that includes at least EU500b of govt bonds and up to EU250b of non-financial corporate and agency/supranational debt, economist Marco Valli writes in Jan. 15 note.
- Timing a close call; plan could be ready on Thursday, as suggested by recent comments from officials.
- There will be probably be some limit to risk-sharing, with national central banks retaining some or all risk.

Market Securities
- ECB likely to announce corporate and sovereign bond purchases on Thursday, economist Christophe Barraud writes in Jan. 19 note.
- Looks for hybrid approach involving risk-sharing across euro-area, limited to a maximum of 50% of total program, and separate purchases by national central banks.
- ECB may not detail specific amount, could give a range; likely to reiterate commitment to expand balance sheet by almost EU1t.

The ECB Bond-Buying Program (OMT) could be capped to €524 billion

On June 11/12, the German Constitutional Court will conduct a public hearing regarding the ESM and OMT. In this context, the ECB should provide details about the terms of OMT to secure that the mechanism would not be prohibited.


According to an article published by FAS this morning, the ECB would have fixed a limit of €524 billion to its bond-purchasing program to assure a smooth passage and avoid a legal challenge.
More from Bloomberg Businessweek:

“European bailout policy will come under scrutiny this week as Germany’s Federal Constitutional Court holds a hearing from June 11 on the country’s participation in Europe’s main rescue fund as well as the ECB’s bond-purchasing program, whose establishment last year was credited with easing market turmoil.
The ECB dismissed a report in the Frankfurter Allgemeine Sonntagszeitung that a limit had been set to the bond-buying program, known as Outright Monetary Transactions. FAS reported that the central bank had communicated a limit of 524 billion euros in a court brief ahead of this week’s hearing as a way of making the program less vulnerable to a legal challenge.
That amount is the total sum of Spanish, Italian, Irish and Portuguese debt with one- to three-year maturities, FAS reported today, citing unidentified central bank officials.”

Yet, the FAS article should be taken cautiously as an ECB spokesman told Reuters that the report is incorrect:


“As indicated on various occasions, there are no ex-ante limits on the amount of Outright Monetary Transactions. Their size would be adequate to meet their objectives.”