ECB Desperation?

Shopping for Bonds

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The ECB is shopping around for bonds from European companies.
  • Why it matters

    Why it matters

    As concerns increase about the weak euro-zone economy, the European Central Bank is searching for new measures and may start buying corporate bonds early next year.

  • Facts

    Facts

    • The euro-zone economy is weak and far from achieving the target set by the European Central Bank for inflation of just under 2 percent.
    • The European Central Bank aims to increase its assets by €1 trillion and fears other measures it adopted will not suffice to reach this goal.
    • The ECB’s plan to buy corporate bonds would be a new scale of buying credit risks issued by firms rather than banks.
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    Audio

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The European Central Bank seems to be getting increasingly desperate as it searches for bonds and securities that it can buy in large enough quantities to have an impact on growth in the euro zone.

The ECB will now reportedly consider whether to buy corporate bonds on the open market, the Reuters news agency reported Tuesday, citing sources in the central bank. A decision will be taken at a meeting of its Governing Council in early December, and it could start buying the bonds in early 2015.

There is an increasingly high level of concern about the weak euro-zone economy and the ECB is seeking measures to increase lending to businesses and stimulate the economy, including by cutting interest rates and offering loans to banks. Buying corporate bonds would mark only the latest unprecedented measure.

In September, ECB President Mario Draghi stated his objective was to increase the ECB’s balance sheet by as much €1 trillion, or $1.27 trillion, to reduce the danger of deflation and provide a lift for growth in the euro zone. The ECB has announced programs that include buying asset-backed securities, covered bonds and issuing long-term loans to banks in a bid to achieve this goal.

“The ECB is maneuvering on a very narrow playing field which is defined by the German opposition to QE.”

Carsten Brzeski, Senior Economist, Ing-DiBa Bank

And yet the target still seems out of reach as a variety of issues – lackluster demand from banks and an unwillingness of European governments to cooperate – have stifled the potential uptake of the ECB’s existing lending programs. People had been wondering how Mr. Draghi will raise the bank’s assets to the €3 trillion level it held in 2012.

The fact that the ECB has now turned to buying corporate bonds is “one sign that we’re getting slightly desperate,” said Carsten Brzeski, a Frankfurt-based senior economist for ING-DiBa Bank. “The question is, will it really work?”

While the ECB is now considering increased buying of corporate bonds, the Governing Council has not yet made a final decision, Reuters reported. The ECB has said it is open to additional measures if needed to revive the euro zone economy, which has seen growth stagnate in the past few months.

“The activities that the ECB has announced over the past few months have managed to lower the euro compared to the dollar. But trust has fallen in the euro-zone economy,” said Christian Schulz of Berenberg Bank.

“The activities that the ECB has announced have managed to lower the euro. But trust has fallen in the euro-zone economy.”

Christian Schulz , Economist, Berenberg Bank

The market for corporate bonds in euros, at €1.4 trillion, is only one-fifth of the size of the market for European government bonds. Buying up the latter is the final major step the ECB could take, said Mr. Brzeski, but opposition to the program known as “quantitative easing” has been especially strong in Germany. While quantitative easing has been used in the United States, Great Britain and Japan, officials in Germany in particular have argued such a program would overstep the ECB’s stricter mandate, which forbids it from financing governments.

The opposition makes it unlikely the bank will be able to intervene in the market for government bonds. The European Court of Justice is also considering a challenge to the ECB’s outright monetary transactions program, in which the ECB pledged to buys bonds issued by European countries if their government bond yields rise so high that they become a threat to the euro’s stability as a currency.

The ECB is “maneuvering on a very narrow playing field which is defined by the German opposition to QE,” Mr. Brzeski said.

The proposed move to buy corporate bonds would see the ECB take on credit risks which are issued by businesses rather than banks.

Following the reports of the bank’s plan, European shares rose on the markets and the euro fell against the dollar to €1.27, a one-cent drop.

While this is probably the intended effect, to strengthen the competitiveness of European firms, criticism is growing from the United States. The question is how long policymakers across the Atlantic will tolerate this development without taking counter-measures.

 

Jens Münchrath leads the team covering economics and monetary policy for Handelsblatt. Christopher Cermak has covered the ECB in Frankfurt and is now an editor for the Handelsblatt Global Edition in Berlin. Allison Williams also contributed to this story. To contact the author: muenchrath@handelsblatt.com

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