The European Central Bank added corporate bonds to its shopping list Wednesday in what the chief economist of Deutsche Bank, David Folkerts-Landau, called an “act of desperation.”
The bank has focused on purchasing government bonds since it launched the controversial program bond-buying in March 2015 to increase inflation and spur economic growth in the euro zone.
Savers, banks and German policy makers such as Finance Minister Wolfgang Schäuble have voiced mounting criticism of the European Central Bank’s money printing and ultra-low interest rates, complaining that it’s hurting savings and retirement provisions, that it’s piling up risks in the German central bank’s balance sheet, and that it isn’t working.
Dealers said the ECB bought bonds of European blue chips including Spain’s Telefonica and Telecom Italia, power companies RWE of Germany and Engie of France, brewing giant Anheuser Busch Inbev, French automaker Renault, German industrial group Siemens and Italian insurer Generali.
The European Central Bank in April increased the volume of its monthly asset purchases to €80 billion from €60 billion. So far it has been buying government bonds as well as the debt of national and international development banks, Pfandbrief covered bonds and asset-backed securities.
The exact amount of corporate bonds purchased will be disclosed in the coming weeks. Many investors expect it to amount to between €3 and €5 billion, or even up to €10 billion, per month. But the initial volumes could be lower.
The bank is allowed to purchase euro-denominated bonds issued by companies whose debt has been assigned an investment-grade rating by at least one rating agency.
The 10 European companies with the biggest volume of outstanding bonds include four from Germany: Deutsche Telekom and the three automakers VW, BMW and Daimler.
“The ECB isn’t equipped to assess the risk of borrowers. Ratings are no replacement for that.”
The approved list also includes bonds issued by U.S. or British companies that have subsidiaries in the euro zone and whose debt qualifies as collateral. The European Central Bank will reveal for the first time on July 18 which bonds it actually purchased.
The move has triggered fresh criticism. Leef Dierks, a professor of economics at the University of Applied Sciences in Lübeck, warned that ECB demand for corporate bonds would distort their market price and could lead investors to systematically underestimate their default risk.
Bond prices have increased and their yields have fallen significantly since March when the European Central Bank announced its plan to buy corporate bonds. The yield on corporate bonds with high credit ratings on average amounts to less than 1 percent now.
Government bond yields have also fallen, both as the result of the bond buying program but also because investors are pilling into safe-haven debt like German Bunds ahead of Britain’s June 23 referendum on whether to remain in the E.U. The waning prospect of a U.S. interest rate hike this month also pushed down yields.
As a result, the average yield on German government bonds in circulation has slipped slightly into negative territory. The yield on the 10-year government bond temporarily reached a historic low of 0.3 percent before rising slightly. Many investors expect it to fall below zero soon.
Rating agency Fitch has calculated that bonds worth $7.3 trillion already have negative yields. A large part of that volume comes from Japan, which has also suffered from negative interest rates.
With yields and refinancing costs already at rock-bottom levels for governments and companies, economists and bankers doubt whether the bond-buying will have the desired effect of spurring investment.
“Additional investments don’t always pay off,” Ingo Nolden, an investment banker at HSBC in Düsseldorf, told Handelsblatt. He said some of the business people he had spoken to in Germany were skeptical about the bond purchases.
“There are companies in various industries whose refinancing is benefiting disproportionately from the interest and monetary policy of the European Central Bank,” he said. That could lead to delays in necessary market adjustments, he warned. “The cheap money doesn’t automatically lead to more investment.”
Mr. Folkerts-Landau, the chief economist of Deutsche Bank, said the drop in bond yields could prompt companies to increase their dividends and boost their borrowing.
The president of the Germany’s Ifo economic institute, Clemens Fuest, said: “The ECB isn’t equipped to assess the risk of borrowers. Ratings are no replacement for that.” He added that there was a risk that “ailing companies might offload their risks onto the European Central Bank.”
Another problem is that the corporate bond purchases are only benefiting big companies that issue such debt. “The main beneficiaries tend to be companies that don’t need it,” said Mr. Folkerts-Landau. The small and medium-sized firms in peripheral E.U. countries that had the biggest problems obtaining capital weren’t profiting from the program, he added.
The National Association of German Cooperative Banks said medium-sized business with no access to the capital market were being put at a disadvantage compared with big businesses. He noted that 99 percent of the small business sector didn’t issue bonds.
Michael Kemmer, managing director of the Association of German Banks, which represent private sector banks, agreed with that assessment. “The ECB should go back to stressing that its extremely expansive monetary policy can’t be a lasting state of affairs and that there is no sign of a serious risk of deflation.”
Andrea Cünnen works on Handelsblatt’s finance desk in Frankfurt, reporting on the bond markets. Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. To contact the authors: firstname.lastname@example.org and email@example.com