Fundamentally, the European Central Bank (ECB) offered in June to provide banks with €400 billion in four-year loans to stimulate economic growth in the eurozone, a process that would involve a dramatic expansion of the ECB's balance sheet. Last week, the ECB launched its first offering of "targeted long-term refinancing operations" (TLTRO) and the markets expected upwards of €150 billion to be subscribed to. Banks borrowed far below that level, only requesting €82.6 billion and deciding to repay €19.8 billion from the ECB's LTRO in 2011-2012. Net liquidity totaled €62.8 billion, way below expectations and likely a disappointment to the ECB itself.
One cannot necessarily fault the ECB, however, as there is a now a negative deposit rate in the eurozone. If banks were to take the liquidity and merely park it as reserves as the ECB, they would essentially be losing money and paying a tax. It is estimated that Italy borrowed approximately €37 billion last week and that Spain's five largest banks borrowed approximately €15 billion. The next TLTRO is scheduled for December, a couple of months after the ECB publishes its asset quality review of eurozone banks' balance sheets - a report that could publicly shame some banks into absorbing more liquidity from the ECB if their assets are deemed worrisome, troublesome, or even toxic.
The likely outcome of last week's poor TLTRO is that the ECB may be forced into widespread quantitative easing (QE). ECB President Draghi in August noted that he expects the ECB's balance sheet will approach 2012 levels, suggesting it could expand about €1 trillion further. At next month's Governing Council meeting, ECB policymakers are expected to unveil details about its asset-backed securities (ABS) purchase plans, a move that could also see it purchase covered bonds.
One possible limitation and risk regarding the ECB's plans relates to the actual size of the ABS market. As of the end of 2013, it is estimated that outstanding ABS totaled about €1 trillion but new volumes in 2013 were only around €76.4 billion, the lowest level since 2009. Similarly, new covered bond issuance for 2014 is only around €119 billion, the lowest volume since at least 2001. We can reliably blame the financial crisis and its ongoing aftermath for the relative dearth in new issuance.
Another potential complicating issue involves which eurozone members' bonds and assets the ECB would actually purchase. Would the ECB stick to countries that need the most financial assistance, or would it attempt to take a uniform approach when leaving bids in the market? Absent a single unique yield curve for the eurozone itself, this is a very contentious issue that has plagued policymakers since well before the ECB's creation.
Between next month's ABS purchase details and December's TLTRO window, Draghi may soon find that he is running out of convention - and unconventional - easing options.
www.trademarketoptions.com
http://goo.gl/DKZ5Nr
http://goo.gl/DKZ5Nr
No comments:
Post a Comment