It speaks volumes as to the credibility of the ECB’s ABS purchase plan that before it has even started the market seems to have completely discounted its ability to get credit to European SMEs. This became obvious when rumours emerged on October 21 that the central bank might be considering adding the purchase of corporate bonds to its increasingly desperate menu of options to dodge the inevitable and not have to buy eurozone sovereign bonds.
Just the whisper of such a plan saw iTraxx crossover spreads drop 20 basis points and Spain’s 10-year spreads fall by 10bp. It is obvious what the market wants. The question is how long Jens Weidmann can hold out before giving it to them.
The ABS plan was always mystifyingly ill-suited to the task. That is why the ECB hastily re-launched covered bond buying alongside it, which began on October 20. Any attempt to greatly increase the size of the ECB’s balance sheet requires a pool of potential assets for purchase far greater than the ABS market can provide. And the recent low take-up of targeted LTRO funds has made the task even harder.
Ignoring for a moment the most screamingly obvious solution to the problem (the eurozone has €6.8 trillion of sovereign debt outstanding), eurozone corporate debt is a large and liquid market. According to RBS, there are €1.8 trillion of corporate bonds outstanding in Europe: €915.2 billion financial and €963.5 billion non-financial.
The governing council at the ECB has emphasized that it has taken no decision on whether or not to start buying corporate bonds, but Mario Draghi yet again has his back to the wall. The problem is that while it would certainly be much easier to buy corporate bonds than ABS, such a move would not solve his problem either. Purchases will have to be investment grade, and investment-grade corporates have never had it so good in the funding markets. They have access to cheap and easy liquidity already. Adding the ECB as a buyer will simply distort the market further.
Unless investment-grade corporates are prepared to take the ECB’s money and lend it on to SMEs (which in some cases they might be), it is hard to see how this works as a credit transmission mechanism. Buying corporate bonds might achieve a lowering of the euro but it will have no impact on lending to the kind of corporates that most need it.
There is a sense that some kind of endgame is finally being reached in Europe. In reading up on this issue we came across a headline from this magazine dated April 2009: ‘ECB poised to focus quantitative easing on corporate debt’. It was a piece asking if Jean-Claude Trichet was poised to announce such a programme. Surely, more than five years later, it is time for something to finally happen?