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 € 1375 bn of assets under the expanded APP, including € 1148 bn under the Public Sector purchase Programme (PSPP) and € 40 bn under the Corporate Sector Purchase Programme (CSPP), and still has to buy € 364 bn of assets until March 2017.
Key points for this month:
- The pace Eurosystem’s purchases remained stable in October (considering the pace of weekly purchases), around € 20 bn per week, including € 17 bn of sovereign bonds.
- The average maturity of the German PSPP securities declined slightly for the first time since early-2016 but remained high (average maturity of 11 years for the October purchases). It continued to increase in the case of France (average maturity of 9.7 years for the October purchases). The trend is a (limited) decline of the average maturity for the Italian and Spanish purchases.
- The intensity of the deviation from the capital key rule remains moderate and approximately the same as in June, July, August and September. The share of sovereign bonds purchased under PSPP in October remained above the capital key weight in the case of Germany, France, Italy and Spain.
- Contrary to market rumours, the Eurosystem continued to purchase Portuguese bonds in October. But the share of Portuguese sovereign bonds purchased under PSPP remained clearly below Portugal’s capital key weight (1.5% instead of 2.6%). The deviation is almost the same for Slovakia.
- The stock of PSPP securities held by the Eurosystem accounts for € 1.15 trn. Note that Eurozone banks’ excess reserves also hit € 1.1 trn. The stock of German PSPP securities held by the Eurosystem reached € 273 bn and accounts for €217 bn for France.
- The pace of CSPP purchases accelerated on the week from 31 Oct. to 4 Nov (€2.5 bn) while the average weekly purchases were around 2 bn per week over the following weeks. Only 17% of the purchases have been conducted on the primary market. That is interesting to have in mind the share of purchases on the primary market converged to 30% for the CBPP3 and ABSPP.
- The ECB balance sheet size hit a new all-time high (close to 3.5 trn).
- 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:
- 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.