The Eurosystem started its QE on March 9 2015 (decision to purchase €60 bn of assets per month until Sept. 2016), decided on December 3 2015 to extend it until March 2017 and decided on March 10 2016 to increase monthly purchases from €60 bn to €80 bn from April 2016. For the time being, the Eurosystem has already purchased € 1032 bn of assets under the expanded APP, including € 879 bn under the Public Sector purchase Programme (PSPP), and still has to buy € 708 bn of assets until March 2017.
Key points for this month:
- The pace Eurosystem’s purchases remained strong during the major part of June (considering the pace of weekly purchases) but slowed markedly on the week following the Brexit vote.
- The stock of German PSPP securities held by the Eurosystem exceeds € 200 bn (currently at 208 bn) and accounts for €166 bn for France.
- The average maturity of the German PSPP securities has never been so high as in June (average maturity of 9.8 years for the June purchases). This is clearly the consequence of all the PSPP constraints. For four months, the average maturity of the German PSPP purchases exceeds that of the French PSPP purchases.
- On March 10, the ECB has decided to lower the share of supranationals purchases from 12% to 10% of total PSPP purchases. This means a higher share of national sovereign bonds in total PSPP purchases (from 88 to 90% of PSPP purchases). Actually, there has been a rise of the share of the national sovereign bonds purchases as % of total PSPP net purchases in April and in May for many countries (Germany, France, Italy, Spain, Netherlands, Austria, Belgium). But this share came back to pre-Q2 levels for Germany, Netherlands, Belgium, Austria…. while it continued to climb for Italy and Spain and remained rather high in France. True, the ECB has not really given up the capital key rule but there are already some changes in the PSPP structure.
- The ECB started the Corporate Sector Purchase Programme (CSPP). During the three full weeks of CSPP implementation, the average purchase has been € 2.1 bn per week. For the time being, 96% of the CSPP purchases has been conducted on the secondary market.
- The ECB balance sheet size hit a new all-time high (above 3.1 trn).
- Eurozone banks’ excess reserves now exceed € 800 bn.
Five 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 expanded APP is extended to corporate bonds issued by investment grade non-financial corporations (CSPP). The deposit rate is cut to -0.40%.
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:
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.