The ECB 2015/16 asset purchase program will include sovereign and quasi sovereign debt, ABS, and covered bonds. The envisaged annualized pace of balance sheet expansion should be around 6% of GDP. Pace and size are conditional on inflation expectations and open-ended, subject to restrictions on market size and issuer quality. The absence of full loss sharing could limit benefits for sovereign credit risk.
The below are excerpts from various sources and comments. Emphasis and cursive text have been added.
On previously announced measures of quantitative and qualitative ECB easing view link here.
The basics of the asset purchase program
“The Governing Council…announced [on 22 January 2015] an expanded asset purchase programme…This…will see the ECB add the purchase of sovereign bonds to its existing…asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year. Combined monthly purchases will amount to EUR60 billion [over 6% of GDP at an annualized rate]. They are intended to be carried out until at least September 2016 and in any case until the Governing Council sees a sustained adjustment in the path of inflation that is consistent with its aim of achieving inflation rates below, but close to, 2% over the medium term…
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. In both cases, this contributes to an easing of financial conditions.”
[ECB Press Release, 22 January 2015]
“In March 2015 the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market. The purchases of securities issued by euro area governments and agencies will be based on the Eurosystem NCBs’ shares in the ECB’s capital key. Some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme.”
[Mario Draghi, 22 January 2015]
“The EUR60bn includes the existing ABS and covered bond purchase programmes (currently averaging around EUR10bn per month), but did not include corporate bonds”
[Nomura Economics Insights, 22 January 2015]
“The main surprise centred around the link made to the inflation outlook in determining the length of the programme (and thus the total volume of purchases).”
[Goldman Sachs, European Economic Analyst, 22 January 2015]
“For now, the most relevant part of the announcement is the ECB’s…open-ended commitment to asset purchases …and clearly puts the evolution of inflation expectations front and centre of the ECB’s future policy decisions.”
[Bank of America Merrill Lynch, Euro Area Watch, 22 January 2015]
Important modalities
“Purchases of additional euro-denominated securities [must] meet the following eligibility criteria…[1] They fulfil the collateral eligibility criteria for marketable assets in order to participate in Eurosystem monetary policy operations…[2] They are issued by…central government, certain agencies established in the euro area or certain international or supranational institutions located in the euro area…[3] They have a first-best credit assessment from an external credit assessment institution of at least CQS3 for the issuer or the guarantor…[4] Securities that do not achieve the CQS3 rating will be eligible, as long as the Eurosystem’s minimum credit quality threshold is not applied for the purpose of their collateral eligibility.”
[ECB Press Release, 22 January 2015]
“We will buy government debt up to the percentage that will allow a proper market price formation. ..we won’t buy more than 25% of each issue, and not more than 33% of each issuer’s debt. The 25% limit, by the way, is the one foreseen in order not to be a blocking minority in the collective action clause assemblies.”
[Mario Draghi, 22 January 2015]
“These [issue and issue] constraints likely mean that the overall purchase capacity of this new programme is likely to be up to EUR1.5trn, assuming a limit of less than 25% of outstanding EGBs… This could theoretically give the ECB room to buy over an additional 6 to 12 months beyond September 2016 in case the inflation path in not consistent with inflation close to 2% over the medium term.”
[Barclays Economic Research Europe, 23 January 2015]
“As regards countries currently in a Troika programme (namely Greece and Cyprus), the ECB has imposed the following conditions for participation: a) that the waiver of collateral eligibility for government-issued securities is in place (and therefore that such countries are in an EU/IMF programme), b) eligibility for purchases will be suspended around reviews and will resume only in the event of a positive outcome of the review…
Greece needs to complete the forthcoming review and also agree on a follow-up adjustment programme to be considered for eligibility. Additionally, it needs to wait until at least the 20 July Eurosystem redemptions to satisfy the issuer restriction..”
[Nomura Economics Insights, 22 January 2015]
“With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing”.
[ECB Press Release, 22 January 2015]
“There is a combined ruling coming from the statutes of the ECB and from a Governing Council decision that a default mode is a full risk-sharing mode…This time, we had a situation where the programme is very large…And so, on the one hand, we want to keep the principle of the risk-sharing in place, and that’s why we retained the 20% share under the regime of full risk-sharing. On the other hand, we want to take a decision that would mitigate the concerns that many participating countries in the euro area have about the unintended fiscal consequences of potential developments in the future.”
[Mario Draghi, 22 January 2015]
Assessment of impact
“We would believe that the measures taken today…will raise…medium-term inflation expectations…There are several channels through which these measures will be effective. The first is the portfolio rebalancing effect, where you basically substitute bonds with cash, and therefore banks, at that point, will have more incentive to lend to the private sector…Then you have signalling effects on inflation expectations.”
[Mario Draghi, 22 January 2015]
“A more aggressive ECB this week should be helpful in arresting a potential negative nominal dynamic between headline inflation, core inflation and inflation expectations. Given that headline inflation is likely to be negative for much of this year, the message from the ECB that it will do whatever it takes to deliver price stability may be very important,”
[J.P. Morgan Europe Economic Research, 23 January 2015]
“Whether the absence of loss-sharing ultimately matters will depend on whether the implementation of QE under these rules affects the market’s probability of default and/or loss given default of a particular country. Because this decision reduces the effectiveness of the portfolio channel and ‘respects’ the political split between creditor and debtor countries, it should all else being equal increase both probabilities of default and loss given defaults of countries that face the most challenging debt trajectories.”
[Nomura Economics Insights, 22 January 2015]
