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ECB QE Monitor – September 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 € 1200 bn of assets under the expanded APP, including € 1002 bn under the Public Sector purchase Programme (PSPP) and € 20.5 bn under the Corporate Sector Purchase Programme (CSPP), and still has to buy € 540 bn of assets until March 2017.

 

Key points for this month :

- The pace Eurosystem’s purchases slowed in August (considering the pace of weekly purchases) but is going to accelerate to around € 20 bn per week in September.
- The average maturity of the German PSPP securities has never been so high as in August (average maturity of 11 years for the August purchases). This is clearly the consequence of all thePSPP constraints.

It decreased (but only slightly) in the case of France or supranational bonds, while remaining high (respectively 9 and 10.5 years).
- The intensity of the deviation from the capital key rule remains moderate and approximately the same as in June and July. The share of sovereign bonds purchased under PSPP in August remained above the capital key weight in the case of Germany, France, Italy, Spain and Netherlands (this is new in the case of Netherlands).
- 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 stock of PSPP securities held by the Eurosystem reached € 1 trn. Note that Eurozone banks’ excess reserves also hit € 1 trn. The stock of German PSPP securities held by theEurosystem reached € 234 bn and accounts for €189 bn for France.
- The pace of CSPP purchases slowed to around €1.2 bn per week in August (it slowed like the other programmes) and is probably to accelerate. Only 7% 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 3.3 trn).

 

ECB asset purchase programme

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FX channel

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Interest rate channel

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Spreads channel

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Banking credit channel

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Wealth effect channel

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Inflation expectations channel

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Confidence channel

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Financial stress channel

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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 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.

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Philippe ITHURBIDE, Global Head of Research, Strategy and Analysis at Amundi
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ECB QE Monitor – September 06, 2016
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