The ECB’s announcement, with its compromise between the size of the purchase programme, larger than expected, and the sharing of risk among countries, more limited than anticipated by the press, has won over the markets……..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The size of the programme is such that it balances the net issues of government bonds over the next two years, and will contribute significantly to the efforts being made to guarantee the sustainability of public debt in higher-risk countries.
The issue of debt sharing is of more symbolic than of practical importance, beyond any debt restructuring scenario.
The ECB has tied the size and duration of the programme to achievement of the 2% goal: therefore, further adjustments in terms of size and duration cannot be ruled out.
With its announcement of an asset purchase programme targeting government and supranational bonds, the ECB has comfortably passed the test posed by the markets. Problems could have arisen form the low level of risk sharing on the purchase of government bonds (only 9%), an aspect over which some commentators had expressed concerns in the past few weeks. The fear was that this could be taken as an unfavourable signal in terms of the monetary union’s cohesion, negatively influencing the level of financial fragmentation and therefore undermining part of the measure’s beneficial effects. One assumption, which ultimately proved to be correct, was that the ECB would attempt to balance its decision on the allocation of risk by announcing a more extensive programme.
Several factors help limit the importance, in practical terms, of the decision to allocate the better portion of risk to individual national central banks. First of all, the programme will positively influence the ability of issuers to service debt, thanks to a reduction of interest expenditure, the contribution made to lengthening maturities, the reduction of the exposure of private investors and, possibly, stronger nominal growth. Furthermore, the states facing hardships will in any case have the option of activating an ESM programme and seeking support via OMTs, on which risk is fully shared. Otherwise, beyond any debt restructuring scenario, if the system is implemented symmetrically to profits, there is no reason to think that failure to share risk will be of any benefit to Germany, that will not fully participate in the division of the stronger coupon flow on Spanish, Italian and Portuguese issues, and on the other hand will have to purchase large volumes large volumes of bonds with negative yields.
The size of the programme seems more than adequate to guarantee an expansion of the ECB balance sheet at least in line with the central bank’s indications over the past few months. Last week we wrote that between 650 and 700 billion euros were required to reach that objective, and the volumes of purchases announced exceeds that amount by around 200 billion, net of the estimated contribution of the two existing programmes (CBPP3 and ABSPP). Besides, Draghi was keen not to rule out an extension of the programme in case it proved insufficient to bring inflation back towards 2%. Considering an allocation of volumes by country based on capital keys, and comparing the volumes involved with our estimates of net and gross issuance in 2015, the resulting indirect cover ratio is very high (see article below for details), and this suggests that ECB purchases will contribute significantly to reducing the cost of public debt, as well as to lengthening maturities over the next two years. On the other hand, some implementation hitches may have to be overcome due to the large size of monthly flows, which could make it challenging for the ECB to raise the required volumes, at least in the first few months.
As regards Greece, which poses the highest risk to the ECB, due to the explicit request for a restructuring of debt set forth by the party that is likely to win a relative majority of the poll on Sunday, 25 January, the ECB has opted to include it in the programme on condition of the country review, currently on hold, yielding a favourable outcome. This decision will further raise the stakes of the negotiations the new Greek government will rapidly have to undertake with international creditors after the elections.
Quelle: BONDWorld.ch
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