September 12, 2014
This is a good timing for an informal Ecofin – no firm decisions need to be taken – but important things need to be discussed, and the narrative needs to change. Mario Draghi went to Milan with the message that for his ABS purchase programme to do any heavy lifting, he needs help from governments. He needs the eurozone finance ministers to find the money for a large investment stimulus. And he will need them, or somebody else, to buy the equity tranches of the asset-backed securities – the potentially toxic stuff the ECB is not going to buy.
Frankfurter Allgemeine has more details of some of the discussions that are running in the background. Sabine Lautenschlager, the German member in the governing council, has proposed guarantees channelled through development banks, most notably the European Investment Bank and the KfW. The financial attraction here is that any purchases of credit tranches would not affect national budgets (or at least not immediately!). The paper quotes Axel Weber, former president of the Bundesbank, as denouncing the ABS-programme as a collectivisation of risk.
In its coverage, the FT writes that, in addition to yesterday’s speech, Draghi will present a paper at the Ecofin, which is very unlikely to meet with the approval of France and Germany – after their finance ministers have made their own, less ambitious proposals to encourage the ABS market.
In a commentary, Charles Wyplosz is asking whether the ABS programme was already QE. Going through the numbers of the stock of ABS in circulation, Wyplosz says the programme was premised on two doubtful hypotheses that credit is restrained by a lack of liquidity. If that were true, how come that banks park €100 billion in excess reserves at negative interest rates? Lack of credit is surely a demand issue. He notes that the ECB programme is more complex, and less certain to work than traditional QE. Wyplosz concludes that the best hope for the ECB’s policies is not the credit channel but the exchange rate.
Reuters Breakingviews is more optimistic. Under the current plans, private-sector investors will still have to buy the equity portion, for which they would need to be rewarded with double digit returns. Right now, senior spreads are too high, leaving too little for equity investors. The authors did some maths (as no doubt the ECB and Blackrock will have done as well) and concluded that a hypothetical CDO SME securitisation would have a senior spread of 2.5%. That would leave a return on equity of only 8%. If the return on the senior spreads halves, it would increase the equity return to 13.5%. With extra leveraging, that return could be increased further. The article ends with a similar argument that Wyplosz has made. If investors believe that the economy will continue to perform poorly, investor demand will not be high.
French Socialists say if Germany does not expand its fiscal policies, then France will have to do it for them; we also have reports on the politics behind the Catalan independence day demonstrations, some shocking OECD data about youth unemployment in Spain, why Spain’s recovery is a zero-sum game for the eurozone; some German flexibility on debt – but not the way you might think; a story on a German bad bank goofing on the sale of Greek bonds, on Irish growth, and on what Renzi needs to do right now to get the Italian economy back on track.