October 22, 2014


Salami-sliced QE, corporate bond edition

A classic first-order journalistic scoop from Reuters, which writes that the ECB was considering to add corporate bonds to its mix of asset purchases because ABS and covered are simply not enough to achieve the goal to increase the size of the balance from about €2tr now to a quasi-targeted level of €3tr.

The article is based on four independent sources, which all confirmed that discussions are ongoing, with two of these sources saying a decision could be taken in December, ready for implementation in January.

What we also thought was interesting was a quote from one of the sources, according to which “many” GC members now believe that the economic situation had taken a turn for the worse.

So what would this achieve? Neil Unmack of Reuters Breakingviews notes that spreads on A-rated corporate bonds are currently 50bp, which is below the long-term average. To get any boost, the ECB would need to buy the risky stuff. If it includes AA-rated bonds, the market size would be only €172bn. Only by moving down the ladder towards BBB would the pool increase to €1tr (and of that the ECB can only buy a certain amount).

Francesco Papadia (@FrancescoPapad1) asks, in our view, the relevant question: Is this part of the private-sector asset purchase programme? In which case one should wonder why it came so late. Or is this part of QE?

Matthew C Klein at FT Alphaville says it was obvious why the ECB should embark on corporate bond purchases, since the whole idea of the ABS programme was to help companies. He says one explanation is a belief in a trickle-down effect from large companies to SMEs.

“… big companies in the euro area often act like banks to smaller companies. Since actual European banks seem either unable or unwilling to boost credit to small and medium enterprises because they are insufficiently capitalised, the ECB may be gambling that non-financial corporations can fill in the gap by borrowing ultra-cheaply in the capital markets and then lending the money onward for a modest return to the real economy. (For what it’s worth, Japanese conglomerates have a history of doing the same thing on a large scale, and it didn’t end well.)”

The German reaction is, predictably, one of disbelief. Philip Plickert notes in Frankfurter Allgemeine that the ECB is fast approaching QE, which he writes is Germany’s red line. Die Welt writes that the ECB risks billions to find a way out of the crisis. They call the decision “surprising”. 

Our other stories

We also have stories on the Commission questioning not just the French and Italian budgets; on growing opposition within the French Socialist party to the 2015 budget proposal; on opposition to the Spanish budget, on the Greek primary surplus, on Beppe Grillo and his proposals for a euro exit; on who pays what into the bank resolution fund, on German producer prices; plus commentary on why Germany is bringing about the next financial crisis, and on reforms.

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