Even though the European public is by now used to ludicrously large sums the amount of the ECB’s latest interventions should raise concerns. The QE programme for sovereign bonds saps up bonds worth €80b every month, a quarter of it German. Now the ECB has put their eye on another way to shower the continent with freshly printed money: corporate bonds. As if sovereign debt QE wasn’t problematic (and ineffective for that matter) enough, as the experience of last year showed.Two days ago the yield on the German 10-year-bond (“Bund”) dropped below zero for the first time. We were used to this happening for the shorter-term German bonds, but not for the backbone of German debt. QE now threatens the liquidity of the (German) bond market, the largest and deepest in Europe, as Germany is both politically reluctant and constitutionally restricted to issue more debt and rightly so I might add, given our debt to GDP ratio is already at 71%¹. Sooner or later, supply of high-quality German debt will run out, which will create several problems.
First for the ECB which then cannot “ease” further without changing its self-imposed rules, which smells an awful lot like discretionary “monetary” (fiscal, actually) policy, and we all know where this dark road leads.
Second, pension funds and similar vehicles will have trouble to invest the money that pours in, since they are by law required to hold high-quality debt, which becomes both scarcer and less profitable by the day.
The ECB distorts the bond markets
Paling in comparison to the sovereign QE programme is the ECB’s latest scheme to extend QE to corporate bonds. Reports by The Economist and Bloomberg say, that the ECB bought blue-chip debt from Siemens, Generali and Telefónica amongst others. This raises several concerns.
First, the ECB directly participates in the gains and losses of the industry, creating incentives to be more “pro-business”, which is entirely different to being pro-markets, as Friedman put it. This will distort both the ECB’s policy (bad) and reputation (worse). How can we expect a central bank to conduct a fundamentally warranted policy, which will hurt the stock and bonds markets, when said central bank owns bonds of the companies? (By the way, a similar argument holds for the sovereign QE programme.)
Second, the ECB distort markets (ok, that’s what they’re out to do) by giving the blue-chips a refinancing advantage. Why should anyone buy the more riskier Mittelstand-bond when the yield no longer matches the risk profile, because the ECB pushed down the whole term structure? And in turn, this hurts innovation since larger companies are usually not the ones disrupting a market.
To be absolutely blunt, a central bank has no business whatsoever in the market for corporate bonds. Granted, usually the ECB holds corporate bonds via the repos to conduct its Main Refinancing Operations, which is fine because the eligible bonds are far off their maturity date. This scheme has become worse with the advent of the Medium- and Long-Term Refinancing Operations, but one may grudgingly agree that this was necessary to shore up Europe’s banks. But buying bonds outright is definitely no best-practice to put it nicely.
Europe’s problem is not a scarcity of credit supply, but demand
European politics’ inability to make the necessary decisions (infrastructure and retirement in Germany, business climate and political stability in Italy, labour markets in France, etc.) will keep confidence down, profits low, capacity unused, investments postponed, jobs absent and growth a fairy tale from the past. There is nothing the ECB could do about it, except for one: Reverse course, taper all easing programmes and return gradually to normal monetary policy to force governments to get their stuff together. The longer the ECB waits, the more it becomes a puppet of the whims of short-term politicians and the erratics of the stock and bond markets, thus it harder it becomes for the ECB, formally the most independent central bank in the world, to act truly independent and do what it can, and not try to achieve things it just isn’t designed to achieve. But doing the right thing by reversing course risks the break-up of the Monetary Union and in turn risks the ECB itself, a risk they obviously deem too high. Pretty little mess we’ve got ourselves into.
¹ There is definitely scope for rolling over debt and use the saved interest payments for investment, but that’s a different story.