jueves, 23 de noviembre de 2017

jueves, noviembre 23, 2017

ECB’s bond buying lets eurozone politicians off the hook

Higher purchases of French and Italian bonds carries risks as the QE programme is extended

by Ciaran O’Hagan


Any ECB largesse, whether overall or towards one country or another, helps smother the usual volatility in bond prices © Reuters


The European Central Bank last month achieved the exceptional feat of halving its bond purchases without upsetting investor sentiment. One of the reasons is because the ECB is favouring bonds that yield more. At the October meeting, Mario Draghi, the ECB President, promised the bank would continue buying “sizeable quantities” of corporate bonds.

That overweight position in yield is coming at the expense of government bonds, and notably German Bunds, which have the largest country weighting and the lowest yields. Back in 2015, when the ECB first embarked on large purchases of public bonds to funnel more cash into the euro economy, the central bank promised it would buy in relation to the “capital key” of each euro area member state — these weights are similar to national incomes.

Yet it has not worked out quite like that. It is increasingly apparent that the ECB is favouring Italian and French bonds, month after month over the course of 2017.

At September’s ECB press conference, President Draghi said “there are temporary deviations from the capital key. There have been deviations, there will always be deviations from the capital key due to the liquidity conditions due to the fact that we’re going to be as market neutral as possible in our purchases. So if you have very tight liquidity conditions in one market, you just slow down with purchases”.

However, the two markets with the biggest overweights relative to capital key are Italy and France. These are also the two with the biggest amount of bonds outstanding. And, along with German Bunds, they are also the most liquid bond markets in euros.

In September, for example, the ECB purchased almost €1bn more of Italian bonds than strict proportionality would warrant. For France, the gap was even bigger at €1.5bn. The average monthly purchase for both countries in the past six months has been above €1bn each. Maybe the ECB does not consider these overweights to be large, but at the margin they are supporting risk sentiment as they add up.

In the absence of a convincing official explanation, one supposition investors have made is that the ECB has needed to compromise so as to satisfy its other purchase criteria. The ECB imposed upon itself caps on individual bond holdings of up to 33 per cent. In countries with low outstanding amounts relative to GDP, such as Germany, this could be a challenge. Germany is Europe’s biggest economy but its purchasable debt is only about 60 per cent that of Italy. So this could be forcing the ECB into favouring the even bigger issuers.

The more that there is a gap between what the ECB says and what the figures show, the greater the political implications. Some politicians in Italy say they would like to see the ECB buy far more Italian bonds. There have even been calls to purchase them in proportion to national debt, instead of capital key or GDP. Italy is Europe’s biggest bond market and would benefit hugely from such a decision.

But any change in weightings would have large political implications. This would mean that countries that run up larger debts would get more ECB support. Yet any hint of a reward for fiscal profligacy would be anathema in the less indebted countries.

The easiest explanation for what’s going on is that the national central banks and the ECB Board have difficulty agreeing what to do. Mr Draghi’s leitmotif this year has been “flexibility”, a catch-all phrase that could reflect some muddle through behind the scenes, and facilitated by the lack of precise data and transparent rules and practices (for example we still don’t know how much time must elapse before euro area national central banks can step in to buy newly issued bonds or their surrogates).

More fundamentally, the lack of progress towards monetary, fiscal and banking union is complicating the execution of ECB policy. One of the reforms on the table now is for the issuance of joint “Euro area Safe Bonds”. This would help solve the ECB’s dilemma through the creation of true euro area treasury bonds. But greater euro area integration and burden sharing is many years away.

The danger in the meantime is that any ECB largesse, whether overall or towards one country or another, and even after last month’s taper, helps smother the usual volatility in bond prices. Political risk lately has not been reflected in yield moves. If ECB policies contribute to overly low yields, the need for brave economic reforms will remain hidden from the electorate. That is in no one’s interests.


Ciaran O’Hagan is head of Euro Area Rates Research at Société Générale

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