ECB Watch
Conservative Mario
Group Economics
Macro & Financial Markets Research
Nick Kounis, +31 20 343 5616
Kim Liu, Aline Schuiling, Joost Beaumont
2 October 2014
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President Draghi strikes a less dovish tone, playing down the size of the balance sheet
ECB announces details of asset purchase programme, but does not specify any scale
We expect central bank to stick to QE-lite approach, rather than step up to sovereign QE
Financial markets could continue to reverse sovereign QE expectations near term
ECB in wait and see mode
ABS and Covered bond purchase programmes likely to be
ECB President Draghi adopted a somewhat less dovish tone in
small
today’s
financial
Meanwhile, the ECB announced the details of its asset-backed
markets. This reflects that expectations of sovereign QE had
press
conference,
which
disappointed
securities as well as covered bond purchase programmes
reached fever pitch in the run-up to the meeting. The ECB
(please see box below). It will start buying covered bonds from
head talked up all the measures the ECB has announced until
mid-October, while ABS will be bought as soon as external
now. He said they will support specific market segments that
service providers have been selected. The programmes will
play a key role in the financing of the real economy. According
last for at least two years. In contrast to previous programmes,
to Mr Draghi, “the massive amount of measures” should ease
the ECB did not attach a specific size. We think that the asset
the monetary policy stance more broadly, strengthen the
purchase programmes will turn out to be relatively modest, at a
central bank’s forward guidance on interest rates and
combined total of EUR 100 – 150bn. The markets are relatively
contribute to a return of inflation rates to levels closer to the
small. In the case of covered bonds, there is negative net
ECB’s aim of below, but close to 2%.
supply, while the ABS market has been recovering only slowly
from its slumber. To see stronger growth in the ABS market, it
Balance sheet not a target
is important that the ECB buys junior tranches, as this would
Moreover, the measures should “have a significant impact on
allow banks to transfer risk from their balance sheets.
the ECB’s balance sheet”. Mr Draghi repeated his statement of
However, this depends on government guarantees, which may
September, saying that “the size of the balance sheet would be
not be forthcoming. Taken together with the TLTROs, we
steered towards the dimensions it had early 2012”. However,
would expect the ECB’s balance sheet expansion to be around
he emphasized that the balance sheet expansion in itself was
EUR 400 – 500bn, which is below what it signalled last month
not a goal of policy, but was merely meant to help the central
(around EUR 700 – 1 trillion).
bank meet its inflation target in the medium term. Turning to
the economic outlook, Mr Draghi mentioned that recent weaker
We expect the ECB to persist with the QE-lite approach
survey data remain consistent with a modest economic
We expect the ECB to persist with a QE-lite approach,
recovery in the second half of the year, while the outlook for a
depending on a combination of the TLTROs and ABS and
moderate economic recovery in 2015 remains in place.
covered bond purchases (and perhaps some other assets) to
support the economy. We think this approach will underpin
Door remains open for more, but less than convincing
demand by keeping downward pressure on the euro,
Mr Draghi left the door open for further policy easing, saying
especially given that the Fed is moving towards the exit. In
that “the Government Council is unanimous in its commitment
addition, together with the AQR and stress tests, the measures
to using additional unconventional instruments within its
should also encourage a gradual recovery in bank lending.
mandate” should it become necessary to further address risks
Most of the drivers we look at are consistent with a moderate
of too prolonged a period of low inflation”. However, during the
recovery in economic growth and a gradual rise in inflation
Q&A following the press statement, Mr Draghi did not add any
(while remaining below 2% for a long time). A major factor that
details, to make this statement more convincing. In addition, he
many commentators are overlooking is the potential impact of
did not make as much effort as on previous occasions to talk
the fall in the euro in supporting exports, and pushing up
down the euro exchange rate.
import prices. In addition, a US-led recovery in global demand
2
Conservative Mario – 2 October 2014
should also help. Finally, domestic drags are easing. Bank
increase more than 10yrs. On the back of this, the 5-10-30 fly,
lending conditions are starting to thaw, unemployment has
which is already expensive at -10bps could move into more
peaked, and house prices are bottoming out.
negative territory.
Lower euro set to push up import prices
Box: Details of asset purchase programmes
% yoy
8
20
Covered bond purchase programme (CBPP3)
6
15
There are some differences between the modalities in the
4
10
current
2
5
programmes. This time, the ECB has not set conditions for the
0
0
-2
-5
-4
-10
Furthermore, fully retained covered bonds are eligible for
-15
CBPP3. Overall, the bonds need to meet the following criteria:
-6
06
07
08
09
10
import prices (lhs)
11
12
13
14
global prices/EER (rhs)
Source: Thomson Reuters Datastream
sovereign QE not likely
If the ECB feels that it is falling well short of its objectives, it
could step up its asset purchases by delving into other types of
debt securities. One attractive option might be euro-level
agency debt, which is the closest security the eurozone has to
‘euro bonds’. We think the ECB will remain reluctant to buy
the
previous
covered
bond
purchase
minimum issue size of the bond or the maximum maturity.
• Be eligible for monetary policy operations;
• Be issued by euro area credit institutions, or in case of multicedulas by SPV’s incorporated in the euro area;
•
It could add other assets to boost programme, but
versus
Be denominated in euros and held and settled in the euro
area;
•
Have underlying assets that include exposure to private
and/or public entities;
•
Have a minimum rating of BBB-/Baa3 (except for Greek or
Cypriot covered bonds);
The ECB might buy 70% of a specific ISIN (30% for Greece
and Cyprus), which is a significant amount.
government bonds. This is due to strong opposition to
government bond purchases at some central banks, not least
the Bundesbank, and the political controversy more widely.
Given this, it would take a significant deterioration in the
growth and/or inflation outlook to force the ECB’s hand. In
such a case, the Governing Council would outvote the
Bundesbank and other opponents of sovereign QE and take
the political fall-out on the chin. The judgement would be that
the fall-out would be a price worth paying given the economic
risks.
ABS purchase programme (ABSPP)
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It will focus on both senior and guaranteed mezzanine
tranches of ABS
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In both primary and secondary markets
•
Senior tranches should be eligible as collateral in the
Eurosytem’s credit operations and have the equivalent of an
investment grade credit rating.
•
The exception to this rule is ABS on claims against entities
resident in Greece and Cyprus.
•
They should also be dominated in euro and have issuer
Financial markets could continue to reverse sovereign QE
residence in the eurozone.
expectations near term
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Following the lower take up in the first TLTRO, financial
private sector entities resident in the euro area – either legacy
markets increasingly priced in the probability of sovereign QE.
or newly originated – of which a minimum share of 95% is
ECB President Draghi’s more conservative stance means
euro-denominated and of which a minimum share of 95% are
these expectations have eased and this trend is likely to
resident in the euro area.
continue in the near term. The pricing out of sovereign QE will
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reflect in modestly higher bund yields (our end of year estimate
subject to ‘some participation’ by other investors.
of 10yr bund yield is 1%) and will leave sovereign credit
spreads vulnerable. The spread of peripheral government
bond yields versus Bunds would have the potential to widen in
the near term. Curve wise, 5-10 will bear flatten, as 5yrs will
They should be secured by claims against non-financial
Fully retained securities will be purchased, but this is
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Conservative Mario – 2 October 2014
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