9 Jan 2015
ECB purchase options – Rabobank
FXStreet (Barcelona) - The Rabobank Team reviews three potential QE purchase options that the ECB Governing Council may discuss at their 22 January meeting.
Key Quotes
“1 - The ECB buys government bonds in proportion to their issuer’s share in the European Central Bank and takes the capital key route. The capital key (the amount of capital held in the ECB) reflects a country’s share in total EU population and in total EU GDP with equal weighting. Note, however, that the capital key has to be adjusted so that only the EA member states are taken into account. This keeps the likes of Poland and the U.K. out of the calculation.”
“Thus, if the ECB decides to introduce an EUR 500bn purchase programme (just for the sake of argument), it would have to buy EUR 17.6bn of Belgian bonds, EUR 127.85bn of German bonds, etc”
“2 - The ECB only buys AAA-rated bonds, forcing sellers to reinvest in paper with a higher risk profile. The thinking here is that ‘displacement effects’ incentivize holders of AAA-rated bonds to switch into AA’s, and those holding AA-rated bonds to switch into A’s, and so on. Ultimately these knock-on effects should bring about an increase in risk appetite and hence an increase in loans to the private sector”
“3 - The ECB not only tasks the national central banks (NCBs) to carry out its monetary operations (i.e. purchasing government bonds) but also requires them to take the credit risk on their own balance sheet. In a way this is similar to NCBs extending Emergency Liquidity Assistance (ELA) to troubled domestic banks who are short of the appropriate collateral to participate in the normal ECB liquidity operations.”
Key Quotes
“1 - The ECB buys government bonds in proportion to their issuer’s share in the European Central Bank and takes the capital key route. The capital key (the amount of capital held in the ECB) reflects a country’s share in total EU population and in total EU GDP with equal weighting. Note, however, that the capital key has to be adjusted so that only the EA member states are taken into account. This keeps the likes of Poland and the U.K. out of the calculation.”
“Thus, if the ECB decides to introduce an EUR 500bn purchase programme (just for the sake of argument), it would have to buy EUR 17.6bn of Belgian bonds, EUR 127.85bn of German bonds, etc”
“2 - The ECB only buys AAA-rated bonds, forcing sellers to reinvest in paper with a higher risk profile. The thinking here is that ‘displacement effects’ incentivize holders of AAA-rated bonds to switch into AA’s, and those holding AA-rated bonds to switch into A’s, and so on. Ultimately these knock-on effects should bring about an increase in risk appetite and hence an increase in loans to the private sector”
“3 - The ECB not only tasks the national central banks (NCBs) to carry out its monetary operations (i.e. purchasing government bonds) but also requires them to take the credit risk on their own balance sheet. In a way this is similar to NCBs extending Emergency Liquidity Assistance (ELA) to troubled domestic banks who are short of the appropriate collateral to participate in the normal ECB liquidity operations.”