Draghi's Dilemma

In Europe, a Seller's Market

Weidmann Draghi ECB Bundesbank Source xx 41845561
Different views: Jens Weidmann, president of the German central bank seen left, and Mario Draghi, his counterpart at the European Central Bank.
  • Why it matters

    Why it matters

    The lack of willing partners in banks could doom the ECB’s bond-buying program before it even begins.

  • Facts


    • The ECB has said it will launch a €1.14 trillion bond buying program in March, buying €60 billion each month until September 2016.
    • About one fifth of outstanding bonds in the euro zone are held by banks that are loath to sell. Another third held by insurers and pension funds that are equally skeptical.
    • Banks in Europe are required to hold safe assets against their riskier lending, making many of them unwilling to part with government bonds that are counted as safe by regulators.
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It’s a simple principle of finance: To be a buyer, you need a willing seller.

The European Central Bank in March will become a buyer in a big way. Its president, Mario Draghi, in January announced the ECB will next month start buying €60 billion per month in government bonds and other assets from investors. It plans to continue the program, known as quantitative easing, until at least September 2016 – a total of €1.14 trillion.

The announcement heralded a revolution in European monetary policy – a last-gasp effort by the ECB to prevent Europe from plunging into a dangerous deflationary spiral and to speed up its economic recovery.

But for the ECB’s bond-buying program – known as quantitative easing – to work, it needs willing sellers.

The problem: Many banks, insurance companies and pension funds in the euro zone are threatening to go on a seller’s strike.

Especially in northern countries, including Germany, Europe’s largest economy, a number of key investors have said they are unwilling to part with the assets they own, according to a survey conducted by Handelsblatt of various financial players. The skeptics include Deutsche Bank, Europe’s largest investment bank by assets.

“We are expecting a fundamental shortage in the market when the ECB starts buying,” said Franck Dixmier, who heads the European bonds department of Allianz Global Investors, the asset management arm of the German insurer.

Many banks are loath to part with their safe government assets in favor of making riskier loans to consumers and businesses.

It is one of the many ironies of Mario Draghi’s efforts to revive Europe’s economy. The ECB primarily wants to help southern European countries, where prices are falling and many businesses are still struggling to get a loan. But to stick to the central bank’s rules, which require its monetary policy to be neutral, the ECB has to buy bonds of northern European countries as well. About one quarter will be bought in Germany, which hardly needs the help.

Quantitative easing has been a key part of the toolkit of central banks in the United States, Britain and Japan since the 2008 financial crisis, but it’s never been tried on the European continent, where the ECB will have to spread its purchases among the 19 countries that make up the euro currency zone.

The ECB’s needs are enormous. It plans to buy about €780 billion in euro-zone government bonds, or about 12 percent of all outstanding bonds on the market, according to estimates. The rest of the ECB’s purchases will be spread among bonds from supra-national institutions and some private assets.

Governments are not expected to issue nearly enough new bonds to satisfy their new buyer. U.S. investment bank Morgan Stanley expects the overall market will shrink by about €260 billion this year as a result.

Draghi ECB-WTB


Indeed this is the point of the entire exercise. The ECB hopes to take government bonds out of the market so that banks may lend the money out to businesses and consumers in Europe instead. It also hopes a shortage of supply will push down interest rates, which are already at record lows, making more businesses willing to borrow money. More loans mean more growth and higher prices.

But the financial sector has to be willing to play ball. Many banks, which hold about one fifth of outstanding government bonds, according to Morgan Stanley, are loath to part with their safe government assets in favor of making riskier loans to consumers and businesses. Especially in German, where the economy is largely healthy, they argue that all the businesses that want and deserve a loan are already getting one.

The biggest skeptics include Deutsche Bank, Germany’s largest bank. Anshu Jain, its co-chief executive, recently said the bank will make little use of the ECB’s program, despite the bank holding tens of billions of euros in government bonds on its balance sheet.

“We are expecting a fundamental shortage in the market when the ECB starts buying.”

Franck Dixmier, Allianz Global Investors

Similar rejections came from banks including WGZ-Bank and the country’s network of state-backed Landesbanken. In the Netherlands, banks including ING, ABN Amro and Rabobank have signaled the same.

Insurance companies and pension funds, which hold nearly a third of the outstanding bonds, aren’t much likelier to participate. They have a responsibility to their policy holders to favor safe and solid long-term investments.

Among insurers, Italy’s Generali and Austria’s Uniqa are among those that have said they will stick to their bond positions, even if the ECB comes calling. A spokesman said the same goes for Dutch pension fund ABP, one of the largest pension funds in the world.

Banks also note that they are required to hold a certain amount of safe assets by regulators. For the moment, banks are not required to hold money in reserve against the government bonds they hold on their balance sheet.

This is likely to change. The ECB’s chief banking supervisor, Daniele Nouy, last month indicated that banks may soon have to hold cash reserves to guard against riskier government assets – or sell them instead. Richard Barwell of the Royal Bank of Scotland said this could make banks more willing to sell to the ECB. But particularly in Germany, where government debt is considered extremely safe, banks will still have little incentive to part with their bonds.

In the end, for Germany, it may all come down to price. Some have offered a bit more leeway here – their bonds can be bought if the price is right. For many here this brings additional concerns – it could cause asset bubbles in Germany by inflating prices well beyond where they should rightly be. Bond yields, already negative in many cases, could fall further still.

Martin Blessing, chief executive of Commerzbank, has signaled that the bank might be willing to part with some of the €52 billion in bonds that it holds. “We will have to see what happens on the price frond, and what consequences this has,” Mr. Blessing said recently.

Investment funds are also more open to making a deal with the ECB, but only if there was a “good price” on the market, according to one major fund manager who declined to be named.

“At some point the ECB should drive the price up to the point where banks are willing to sell,” said Mr. Barwell, chief economist of the Royal Bank of Scotland.


Handelsblatt editors Andrea Cünnen, Elisabeth Atzler, Ingo Narat, Hans-Peter Siebenhaar, Jens Münchrath, Katharina Kort, Kerstin Leitel, Thomas Hanke, Anke Rezmer and Yasmin Osman contributed to this story, as well as Christopher Cermak, an editor with Handelsblatt Global Edition. To contact the authors: cuennen@handelsblatt.com or cermak@handelsblatt.com

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