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ECB QE Monitor – October 06, 2016

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 € 1273 bn of assets under the expanded APP, in-cluding € 1061 bn under the Public Sector purchase Programme (PSPP) and € 30 bn under the Corpo-rate Sector Purchase Programme (CSPP), and still has to buy € 467 bn of assets until March 2017.

 

Key points for this month :

- After the three weeks of strong purchases, the pace Eurosystem’s purchases slowed during the last week of September (considering the pace of weekly purchases).
- The average maturity of the German PSPP securities has never been so high as in September (average maturity of 11.7 years for the September purchases). This is clearly the consequence of all the PSPP constraints. It increased also in the case of France or supranational bonds, while remaining high (respectively 9.6 and 10.8 years).
- The intensity of the deviation from the capital key rule remains moderate and approximately the same as in June, July and August. The share of sovereign bonds purchased under PSPP in September remained above the capital key weight in the case of Germany, France, Italy and Spain.
- The share of Portuguese sovereign bonds purchased under PSPP remained clearly below Portugal’s capital key weight (1.6% instead of 2.6%). The deviation is almost the same for Slovakia.
- The share of CSPP purchases done on the primary market increased significantly to 17% in September, still below what has been done for the CBPP3 and ABSPP.

 

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Appendix

  • 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 Eu-rosystem 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 de-posit 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.

 

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ITHURBIDE Philippe , Global Head of Research
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ECB QE Monitor – October 06, 2016
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