{"id":39737,"date":"2015-01-26T01:29:55","date_gmt":"2015-01-26T00:29:55","guid":{"rendered":"http:\/\/beta.next-finance.net\/strategie\/ecb-full-qe\/"},"modified":"2019-12-30T23:21:04","modified_gmt":"2019-12-30T22:21:04","slug":"ecb-full-qe","status":"publish","type":"post","link":"http:\/\/beta.next-finance.net\/en\/strategie\/ecb-full-qe\/","title":{"rendered":"ECB full QE"},"content":{"rendered":"

It\u2019s a done deal, there will be a full QE in Eurozone, and it will be massive, with EUR 60bn of purchases each month
\non top of the upcoming targeted longer-term refinancing operations (TLTRO).<\/p>\n

The European Central Bank (ECB) announced three measures:
\n
(1) A full QE.
\n
(2) A cut in the interest rate applicable to the next six TLTRO in line with the repo rate, i.e. 0.05%, which means that
\nthe ECB has waived the 10bp spread over the MRO rate applied in the first two TLTRO.
\n
(3) Repo rate kept on hold. After the decision by the Swiss National Bank and Danmarks Nationalbank, the ECB
\nconfirmed it was not adjusting its own key monetary policy rate, which it considers to be at a floor. There were talks
\nthe rate for the deposit facility could be raised to encourage banks to sell eligible assets to the ECB without being
\npenalised by being long cash. However, logically so, the decision was taken to maintain a negative rate, the intention
\nbeing to inject liquidity, but not for this liquidity to find its way back on the central bank\u2019s balance sheet.
\nOf course, the most important measure was the decision to expand QE to include bonds issued by Eurozone central
\ngovernments, agencies and supranationals. In effect, QE was already under way through non-sterilised purchases of
\ncovered bonds (CB) and asset-backed securities (ABS), also with the VLTRO (through the intermediary of the banks
\nand the carry generated by these operations).<\/p>\n

About the size<\/h2>\n

Combined monthly purchases to amount to EUR 60bn (both private and public sector assets) from March until at
\nleast September 2016, i.e. EUR 1,140bn in total. This is more than the EUR 50bn that had been bandied about.
\nEspecially, this in addition to the liquidity that will be injected by the six TLTRO scheduled in 2015 and 2016. This
\nmeans that the ECB\u2019s balance sheet will be restored to its 2012 dimension and even more: around EUR 3.3trn
\n(depending on assumption concerning demand at the TLTRO), which is a record for the ECB. This means that in
\nterms of the size of the balance sheet in relation to GDP, the ECB\u2019s QE at end-2016 will exceed the Federal Reserve\u2019s
\n(33% vs. a maximum of 26% for the Federal Reserve). The expansion of the balance sheet in relation to 2008 levels
\nshould be of the same order as for the Federal Reserve (i.e. an increase of between 10 and 11 points of GDP).
\nVery importantly too, the press release states that purchases are intended to be carried out until at least September
\n2016 and \u201cin any case until the Governing Council sees a sustained adjustment in the path of inflation
\nthat is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium
\nterm\u201d. This means that the ECB\u2019s balance sheet could reach EUR 3trn, but possibly significantly more.<\/strong>
\nWhile details are still awaited concerning the breakdown between asset classes the ECB has already indicated that
\nthe purchases of securities of European institutions would represent 12% of the additional asset purchases.<\/p>\n

About the securities<\/h2>\n

In addition to CB and ABS, the ECB is expanding its purchases to include bonds issued by Eurozone central
\ngovernments, agencies and European institutions (i.e. EFSF, ESM, EIB, EU, EBRD, etc.) but not corporate bonds.<\/p>\n

To be eligible for the expanded asset purchase programme, securities must be denominated in euro and have a
\ncredit rating of at least BBB- (best-credit assessment basis), with exceptions in the case of Member State under
\nfinancial assistance programmes. This signifies that, as indicated by Mario Draghi, the ECB should buy Portuguese
\nand, potentially, Greek bonds, but only from June of this year (as the central bank must wait for purchases made
\nunder the SMP to reach maturity).
\n
The ECB has indicated that index-linked bonds will be eligible for purchase under the expanded asset purchase
\nprogramme.<\/p>\n

Securities must have a minimum remaining maturity of 2 years and a maximum remaining maturity of 30 years at
\nthe time of purchase (which had not necessarily been fully priced in by the market, as reflected by the significant bull
\nflattening at the long end observed yesterday). The ECB will be able to buy securities offering negative yields.<\/p>\n

About the process<\/h2>\n

In this case too, and as we announced, the ECB will proceed through purchases by national central banks (NCB)
\napplying the ECB capital key (see Market Round Up daily of 12 January: \u201cIn sum: the ECB can be expected to
\nannounce an expansion of its asset purchase programme to other asset classes eligible as collateral, rated at least
\nInvestment Grade. The bulk of these purchases should concern Eurozone sovereigns (for reasons to do with liquidity)
\nthat would be acquired by NCB (under the umbrella of the ESCB) based on the ECB capital key\u201d).<\/em>
\n
This means that ECB purchases will be confined to the secondary market, with the application of aggregate holding
\nlimits, complying in this respect with the recent ECJ legal opinion that purchases must not distort prices in the
\nsecondary market. In addition, to this end, the ECB has indicated it will be active in the repo market for bonds issued
\nby Eurozone central governments, agencies and certain European institutions. _ It has indicated that aggregate
\nholding limits will be 33% per issuer and 25% per line.
\n
NCB will purchase most of the securities and all of the securities of European institutions (i.e. 12%), while the ECB
\nwill hold 8% of the additional asset purchases (i.e. excluding CB and ABS).
\n
Based on the assumptions set out below for CB and ABS and assuming the programme totals EUR 1,140bn (i.e. EUR 60bn a month over 19 months) applied using the ECB capital key, this means that EUR 690bn of central
\ngovernment and agency bonds will be purchased under the expanded asset purchase programme, with notably
\nEUR 177bn for Germany, EUR 140bn for France, etc.<\/p>\n

\"bce_-_full_qe_1_-uk.jpg\"<\/p>\n

Amounts are far from neutral if one considers that the bulk of the purchases will concern govies, when compared
\nwith amounts expected to be issued this year and, especially, net supply (EUR 2bn for Germany, EUR 97bn for
\nFrance, etc.).<\/p>\n

\"bce_-_full_qe_2_-_uk.jpg\"<\/p>\n

Risk sharing<\/h2>\n

With regard to the sharing of hypothetical losses, it was decided that, in the event of default, direct purchases by the
\nECB (8% of the additional asset purchases) as well as purchases of securities of European institutions (12% of the
\nadditional asset purchases) will be subject to loss sharing, i.e. borne by the ESCB (ECB plus NCB).<\/p>\n

Other purchases will be carried on the balance sheets of each NCB.
\nThat was one of the big question marks, hence it was somewhat of a disappointment that the ECB should have given
\nin to pressures from certain NCB governors (in particular Jens Weidmann) to have NCB bear most of the risk. At the
\nsame time, the ECB overcame this hurdle by explaining that this did not denote the absence of risk sharing since
\nOMT are covered in their entirety by the ESCB. If there is an excessive widening of spreads, this would be addressed
\nby the OMT programme, QE being intended solely as a monetary policy tool (and considered so apparently
\nunanimously).<\/p>\n

In the past, other monetary policy measures have drawn a distinction between national and European risks (ELA,
\nTier 1 vs. Tier 2 collateral). In the event of default, and pursuant to the conditions set out in the ECJ legal opinion,
\nthe pari passu principle would apply to the ECB (and\/or NCB), which would be concerned by a credit event in the
\nsame way as any investor.<\/p>\n

\"eonia_forwards_on_ecb_dates_before_and_after_ecb_meeting.jpg\"<\/p>\n

About the impact<\/h2>\n

The macro impact risks being limited (see Let\u2019s get this party started). As regards the market, it would have been
\nmainly the absence of major measures that would have been a real market mover. Considering that a EUR 500bn
\nasset purchase programme was anticipated, one can expect a bull flattening and convergence trades (search for
\nliquidity plus pooling, albeit partial) to predominate, while euro looks set to extend its decline whereas risky assets,
\nespecially equities, should benefit, probably even gold in the short term. Similarly for the short end, one can expect
\neven more issues to slip into negative territory.