Everyone knows the positives, or rather positive, even if nobody at the ECB is willing to come out and say it: the ECB’s QE – whose structural details were laid out previously - will boost stock prices, and… that’s it. Who benefits as a result of this has now become a socioeconomic and philosophical discussion.
So here, courtesy of ADMISI’s Marc Ostwald, are the negatives:
- Risk sharing is very limited, with national central banks taking 80% of the risk on sovereign bond purchases, and rather un-reassuring was Draghi’s comment that “most national central banks have adequate buffers to absorb a negative event” – most being how many.
- Not good news for Greece, while it and Cyprus will be eligible for purchases of govt under a ‘waiver’ for (bail-out) ‘programme countries’, the ECB already has a very high volume of Greek bonds on it balance sheet from the SMP programme, and given a limit on total holdings for each sovereign issuer, it will not be eligible for purchases until it redeems debt in July asnd August. It should be added that other Italy and Spain and other bail-out countries will implicitly also have a lower available volume of total purchases, until SMP holdings are redeemed.
- BUT perhaps the key aspect relates to the limits on the 25% limit on purchases of a single issue, which ensures that the ECB adheres to the ECJ’s ruling about the ECB ensuring that is does not interfere with “price formation“. So here’s the key aspect, there are some $12.0 Trln of FX reserves in the world, of which roughly a quarter are held in Euros. Operating on the traditional metric that roughly half of those will be invested in Govt Bills and Bonds, this means that FX reserve managers will have to be involved in the process of establishing prices for whatever is purchased under the Govt bond QE programme. Eminently anything that is sold by central banks will not find its way into the private financial sector, therefore that EUR 60 Bln figure may often overstate what is being injected into the market.
- Last but not least, the expanded programme does not start until March 15, so “Mr Market” now has a very long waiting period to sit on holdings of EUR debt before selling to the ECB, and with plenty of event risk in the world, starting with the Greek election, and to mention the prospect of an imminent Ukrainian default. Sort this under an uncomfortably long period before the QE ‘party’ gets started.