The European Central Bank’s (ECB’s) recently announced QE package—wherein the bank will buy €60 billion of public and private securities a month through at least September 2016—was widely anticipated, and as such much of the impact on markets had transpired long before Thursday. While the announcement does represent a watershed moment given the ECB is the last major central bank to implement QE, investors have been waiting for/expecting this move since ECB President Mario Draghi’s infamous “whatever it takes” speech in July 2012.
The plan’s details—which call for the ECB and national central banks (NCBs) to buy debt issued by governments, agencies, and banks—are complex, with very specific rules about what debt is eligible. Investors do not need to get in the weeds on this other than to understand the ECB’s motives. In its own words: “The ECB will buy bonds issued by euro-area central governments, agencies, and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy.” (Emphasis added) There is also a risk-sharing plan for 20% of the purchases (institutional debt only), with NCBs holding 60% (12% of overall debt) and the ECB the other 40%. In other words, for most purchases, including all government debt, the risk will be borne entirely by the purchasing NCB.
The plan seeks to achieve the same goals as the ECB’s prior LTRO and TLTRO programs, both of which were aimed at loosening credit conditions … and which have both been plagued by low take-up due to lack of credit demand. As we said in August,
The stubborn resistance of European credit growth to increasingly aggressive actions by policymakers speaks to a fundamental disconnect between actions—which seek to make it easier and more profitable for banks to lend—and the underlying problem of a lack of creditworthy borrowers. Thus, we expect the TLTRO—to say nothing of any future attempt at QE—to have a similar effect to prior programs, namely to further depress bond yields but do little to boost bank lending.
Despite all the theatrics around QE, the actual ECB program itself is not only relatively pedestrian, but is arguably a solution in search of a problem. Much as the ECB’s alphabet soup of plans designed to spur bank lending by increasing the supply of credit have yet to see success—since the main problem is a lack of loan demand—it is hard to understand how a program of buying government bonds will act as a stimulus when most European bond yields are at multi-generational lows. The ECB’s other stated goal—to boost consumer prices—also seems an unlikely outcome of this plan.
European equity markets—and perhaps global markets as well—could catch a bid, particularly given the US QE program’s success in lifting risk assets. But based on what seem to be diminishing returns in this area—the effects of the Bank of Japan’s “Halloween surprise,” for example, already seem to have worn off—we would expect any such effects to be short-lived. As noted, investors have had two and a half years to prepare; one could argue the biggest risk is disappointment now that there is an actual plan in place (i.e., buy the rumor, sell the news).
Some second- or third-order effects could result from the ECB’s package, including a lower euro leading to an export boost, particularly for Germany. Such outcomes are dependent on a number of variables—was QE already reflected in the euro’s recent decline?, to whom will companies export given weak global economic growth?, what will other central banks do in response?, etc.—and seem a thin reed given the epic anticipation surrounding what some are calling the ECB’s “big bazooka.”
The bottom line is the ECB’s QE package is basically what the market has been expecting for some time, and thus may well prove to be less effective than was investor anticipation building up to it.
Eric Winig is a Managing Director on the Cambridge Associates Global Investment Research team.
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