Key points for this month:
- No major change in terms of APP composition between PSPP (around 85%), CSPP (slightly above 10%) and CBPP3.
- The average maturity of the German securities purchased under the PSPP remained very low at 4.7 years. It remained stable in France (9.2 years) and in Italy (9 years).
- The intensity of the deviation from the capital key rule has never been so high. The share of German securities purchased under the PSPP fell to a new low (almost 1pp below the capital key share), while it increased strongly for France and for Italy. It is too soon to say this is a new and permanent feature of the PSPP as a fall of the share of German securities purchased under the PSPP already took place in June 2016 (the Brexit vote month). Maybe, the Bundesbank did not want to fuel the flight-to-safety trades that took place before the French elections).
- The stock of PSPP securities held by the Eurosystem accounts for more than € 1.5 trn. Note that Eurozone banks’ excess reserves also hit € 1.5 trn.
- The ECB balance sheet size now accounts for more than 37% of GDP.
NB: ECB data take amortization adjustments into account. “The amortization emerges from an accounting principle that implies that securities purchased at prices below face value have to be revalued upwards over time towards maturity, and revalued downwards over time, if purchased at prices above face value.” This may explain negative figures.
Six important dates to have in mind
- June 5, 2014: Mario Draghi announces the ECB wants to expand its balance sheet to the 2012 level. Negative deposit rates and the launch of a TLTRO programme are also announced.
- January 22, 2015: the ECB decides to launch an expanded asset purchase program (sovereign QE).
- March 9, 2015: the expanded APP turns effective. The ECB starts buying sovereign bonds.
- December 3, 2015: the ECB announces that the QE is extended until March 2017 and that the PSPP is extended to local and regional governments’ debt securities. Maturing assets held by the Eurosystem will be reinvested “as long as necessary”. The deposit rate is cut to -0.30%.
- March 10, 2016: the ECB increases the monthly purchases from €60 to 80 bn (the termination date becomes March 2017). The expanded APP is extended to corporate bonds issued by investment grade non-financial corporations (CSPP). The deposit rate is cut to -0.40%.
- December 8, 2016: the ECB announces it extends the QE until the end of December 2017 but at a monthly pace of €60bn from April to December. The ECB announces it would increase the programme in terms of size and/or duration “if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation. The maturity range for the PSPP is enlarged (from 1 to 31 years) and purchases with a yield to maturity below the deposit rate will be permitted.
Implementation seems like a simple matter, at least in principle. The ECB will nonetheless be faced with the challenge of purchasing €60 bn in securities each month in illiquid markets that are short of willing sellers. QE encourages market players to buy or hold on to assets rather than selling them. Meanwhile, the banks, which are major holders of government debt, retain these assets in portfolios for regulatory purposes or simply out of liquidity considerations, as the securities can be used as collateral. Given this backdrop, unless there is an explosion in issuance by governments, a rapid change in regulators’ policy or “forced” sales by public funds (is this not what Japan demanded of public pension funds?), the ECB’s drive to establish this program will inevitably run into the realities of the market, which will undoubtedly push down short and long-term interest rates even further.
We have already alluded to the importance of transmitting QE to the real economy. Several transmission channels will have to be activated in order for growth to be revived:
- An “exchange rate effect”: any currency depreciation would contribute to competitiveness and/or help restore business margins and/or lead to natural profit growth;
- An “interest rate effect”: any additional drop in interest rates would improve the creditworthiness of indebted entities and offer (potential) support to bank lending;
- A “banking credit effect”;
- A “spread effect”: the same impact as lower interest rates;
- A “wealth effect”: growth in the equity and real estate markets would elevate the wealth of market players, both consumers and investors;
- An “inflation anticipation effect”: the ECB’s intention is to stop the deflationary spiral, as lower prices mean lower consumption;
- A “confidence effect”: without confidence, it will be difficult for growth to take off.
- PSPP : Public Sector Purchase Programme;
- APP : Asset Purchase Programme;
- CSPP : Corporate Sector Purchase Programme;
- CBPP : Covered Bond Purchase Programme;
- SMP : Security Market Programme;
- ABSPP : Asset Back-Backed Securities Purchase Programme.