August 23, 2016
We had hoped to kick off today's newsbriefing with an account of the Renzi/Merkel/Hollande summit in Ventotene, but the results were so shallow that we decided to ignore it. It was a PR stunt to boost Renzi's flagging reputation in his own country.
Instead, what caught our attention was a story in the Wall Street Journal according to which investment banks and companies were creating debt with the sole purpose that the ECB buys it as part of its corporate sector purchase programme (CSPP). The paper writes in two instances the ECB had bought directly from companies through private placements - off-market one-to-one transactions. We are surprised to learn that this is allowed under the ECB's framework, but apparently this is so.
The two placements were both done in Spain, where the Bank of Spain holds a portion of a €500m bond issued by Repsol on July 1, and a portion of a €200m deal from Spanish power utility Iberdrola. It is impossible to say exactly how much the ECB/BoS holds because the NCPs only disclose which bonds they bought, but not how much. All we know is the total of corporate bond holdings of the ECB, which as of August 12 were €16bn.
The two bonds were sold on June 10, two days after the official start of the CSPP. Both deals were arranged by Morgan Stanley. They were the only private placements since the start of the ECB’s corporate buying programme, according to an analysis by the paper. The journalists tried to get some response from the various people involved, but only Repsol responded by saying that it makes sense for the company to lock in low borrowing costs.
The paper writes that after it confronted the ECB on this matter, the ECB had updated its website with the clarification that the ECB can participate in private placements. It cited an ECB spokeswoman as saying that the ECB was not involved in defining the characteristics of the bonds in these sales. Private placements are generally non-transparent. There is no prospectus.
The article also provided some statistics on the yields of corporate since the start of the CSPP in June. The average yield of the eligible paper has fallen from 1.28% before the announcement of the CSPP in March, to 0.99% when the purchases started in June, to 0.65% now. According to research quoted in the article, eligible bonds have outperformed ineligible bonds by 30%.
We also have stories on Nicolas Sarkozy's candidacy; on the political timetable in Spain; on Turkey recalling its ambassador to Austria; on how to absorb the losses on Novo Banco; on Brad Setser's discovery of a contradiction between the IMF's own framework and its policy recommendations for the eurozone; on the eurozone's lack of resilience; and on the size of fiscal transfers in a hypothetical federal eurozone.