ECB QE could theoretically surpass €2 trillion according to reported program details - page 2
You are missing trading opportunities:
- Free trading apps
- Over 8,000 signals for copying
- Economic news for exploring financial markets
Registration
Log in
You agree to website policy and terms of use
If you do not have an account, please register
Draghi's Rescue Plan Has Created a $103 Billion Problem
There's a corner of the pension world that needs to brace itself for Mario Draghi.
His European Central Bank's 1.1 trillion euro ($1.2 trillion) bond-buying plan might have already blown a 92 billion-euro hole in defined-benefit pension plans by depressing bond yields, Standard & Poor's said Feb. 26. And if the actual start of QE pushes yields further, for longer, companies may have to take drastic measures to make ends meet, and could face a hit to their credit ratings.
The ECB is expected to announce further details of its asset-purchase program after it meets in Cyprus Thursday.
S&P estimates that the anticipation of quantitative easing in Europe squashed bond yields so much that the liabilities of defined-benefit pension plans rose by up to 18 percent last year. Its analysis looked at the top 50 European companies it rates that have defined-benefit pension plans and are "materially underfunded," meaning, the plans have deficits of more than 10 percent of adjusted debt, and that debt is more than 1 billion euros. In 2013, liabilities outstripped obligations for that group by more than 30 percent on average.
"The challenge for companies in coming years will be how to rein in plan deficits in the new post-QE low interest-rate environment in Europe," Paul Watters, credit analyst at S&P, said in a statement. "This will become a more material credit consideration where defined-benefit plan deficits are significant."
Among the measures S&P says companies may have to take to adjust to this new low-yield world are freezes on pensionable salaries, raising the retirement age, and closing plans to new or even to existing members.
And that's not the end of it. A potential cocktail of low bond yields, sluggish growth and faster inflation, which could result if QE fails to kickstart activity, could push those deficits out a further 10-15 percent.
"The risk remains that QE achieves nothing more than promoting stagflation in the euro area," Watters said. "A combination of weak growth, inducing the ECB to continue with its aggressive monetary-policy stance, and rising inflation would be a treacherous combination for DB-pension schemes already struggling to contain their plan deficits."
source
Draghi’s Inflation Gap Dashboard Points to Stimulus Extending
Federal Reserve Chair Janet Yellen has her labor-market dashboard to help shape policy.
For President Mario Draghi, the European Central Bank’s analog may be an emerging inflation dashboard -- tracking the distance between the ECB’s goal of consumer-price growth just below 2 percent and its own projections.
Right now, with the ECB set to roll out its 1.1 trillion-euro ($1.2 trillion) bond-buying plan, the dashboard is flashing the need for stimulus.
“If the inflation gap widens, and the monetary-policy stance remains unchanged, it follows that there is a ‘missing stimulus’ to which we may need to respond,” Peter Praet, the ECB’s chief economist, said in a speech last month.
Here’s how it works: In December, the ECB forecast inflation will average 1.3 percent in 2016. That means a miss of about 0.6 percentage point from its goal of, let’s say, 1.9 percent. That’s up from a gap of 0.4 percentage point based on the ECB’s March 2014 projections.
That issue was serious enough for Draghi to announce the quantitative-easing program that is scheduled to run until September 2016 or until there’s a “sustained adjustment” in inflation toward the goal. More details, along with new inflation, forecasts are set to be released on Thursday after the Governing Council meets in Nicosia, Cyprus.
‘Considerable Miss’
Citigroup Inc. economists Guillaume Menuet and Antonio Montilla say the inflation gap won’t close enough for the ECB to cease its stimulus in 18 months, making more easing likely. Last April, Citigroup was among the first to say QE in the euro area was more likely than not.
The inflation gap is even wider in Citigroup’s eyes if the ECB’s annual forecasts are weighted for importance. To them, the ECB’s prediction for 2016 is more than twice as significant as their estimate was for 2014.
Allow for that and the gap was 0.94 percentage point in December, what Menuet and Montilla call “a considerable miss” and the widest since the recession year of 2009.
A measure of views in the financial markets also points to a gap. Using inflation swaps, Citigroup calculates that only about 45 percent of investor bets take the ECB’s inflation strategy as credible. That’s up from about 30 percent at the turn of the year, yet well below the 90 percent of mid-2012.
The central bank’s own survey of private-sector forecasters in January also found a higher probability of inflation between 0 percent and 1.4 percent in five years than of 1.5 percent to 1.9 percent.
Policy makers including Executive Board member Benoit Coeure have called the bond-buying program open-ended, and Menuet and Montilla say it will have to be.
“Our estimates of the ECB’s inflation gap suggest that additional stimulus will likely be required to convince investors that it can deliver on its medium-term inflation mandate,” they said in a Feb. 27 report. “The ECB will need to work beyond September 2016 to close some of its credibility deficit.”
source
I agree about the european middle class. Tragic this is.
Not just European middle class. Davos declared a war to the middle class all over the world
I agree with that. But they will get hit the hardest, first. Then it will shake down to everyone else. More war anyone?
I agree with that. But they will get hit the hardest, first. Then it will shake down to everyone else. More war anyone?
War is a must. But it is already on - just that we are not aware of it. They are after our money - they do not want to spend money on foolish ammunition and stuff like that : old fashion war is too expensive. This way all the spend is some time on creating lies
Clock Ticks Down to QE in Europe With Bond Yields at Record Lows
The final countdown is under way for the European Central Bank’s program of government-bond purchases, which already fueled a debt-market rally that sent yields across the euro region to record lows.
The ECB will start its 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan on Monday, President Mario Draghi said in Cyprus this week. The purchases, which are to include public and private debt, will be conducted in the secondary market by national central banks via existing counterparties.
Draghi spurred demand for higher-yielding bonds on Thursday, when he said securities won’t be purchased if their yields are below the ECB’s deposit rate of minus 0.2 percent.
“What markets will key in on most is exactly what kind of rhyme or reason are we able to sort out from their buying patterns,” said Richard Kelly, head of global strategy at Toronto Dominion Bank in London. “The early flow will be parsed to see if they are concentrating in any particular area of the curve and if it looks coordinated and correlated across countries or not.”
Yields have plunged on concern the plan may lead to a scarcity of fixed-income assets. Eighty-four of the 346 securities in the Bloomberg Eurozone Sovereign Bond Index have rates below zero, data compiled by Bloomberg showed on Friday, meaning buyers would get less back when the debt matures than they paid to buy them. That includes all German government bonds due in six years or less.
‘Optimistic Sellers’
“We see optimistic sellers at the start of the program,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG in Frankfurt. “Accounts who have bought in advance of the ECB purchases will sell and thus it may initially look like they can achieve their volumes quite smoothly until the scarcity” concerns emerge, he said.
Only securities due between a minimum two years and a maximum 30 years and 364 days at the time of purchase will be eligible, and there are other limits on how many bonds can be bought to reach the target of 60 billion euros a month.
The trading desks of the euro-area’s national central banks do have some discretion over what they buy and when, the ECB said in a March 5 document.
Italy’s 10-year yield fell one basis points, or 0.01 percentage point, in the week to 1.32 percent at the 5 p.m. London close on Friday. It touched 1.259 percent, the least since Bloomberg began collecting the data in 1993.
The price of the 2.5 percent Italian bond due in December 2024 rose 0.115, or 1.15 euros per 1,000-euro face amount, to 110.81.
ECB Wary
German two-year notes missed out on the gains after Draghi effectively set a minimum rate of minus 0.2 percent for ECB purchases. Yields on the securities climbed to a four-week high of minus 0.184 percent on Thursday before ending the week at minus 0.207 percent. They rose for the first week since Dec. 5.
Speculation over the form the quantitative-easing program will take has dominated trading of euro-area bonds since it was announced in January. The first clues as to how it will work in practice will emerge on Monday.
“As a rule we’d expect the lines least easy to source to benefit more than benchmark issues that are still being tapped,” Ciaran O’Hagan, head of European rates strategy at Societe Generale SA in Paris, wrote in an e-mailed note. The central banks “will be wary of not creating large price distortions.”
source
The ECB’s Lunatic Full Monty Treatment
Not Quite Right in the Head?
The belief that the market economy requires “steering” by altruistic central bankers, who make decisions influencing the entire economy based on their personal epiphanies, has rarely been more pronounced than today. Most probably it has actually never been stronger. It is both highly amusing and disconcerting that so many economists who would probably almost to a man agree that it would be a very bad idea if the government were to e.g. take over the computer industry and begin designing PCs and smart phones by committee, think that government bureaucrats should determine the height of interest rates and the size of the money supply.
We know of course that central banks are the major income source for many of today’s macro-economists, so it is in their own interest not to make any impolitic noises about these central planning institutions and their activities. Besides, most Western economists have not exactly covered themselves with glory back when the old Soviet Union still existed. Even in the late 1980s, Über-Keynesian Alan Blinder for instance still remarked that the question was not whether we should follow its example and adopt socialism, but rather how much of it we should adopt.
The recent ECB announcement detailing its new “QE” program once again confirms though that there is nothing even remotely “scientific” about what these planners are doing. Common sense doesn’t seem to play any discernible role either. Below are the 10-year government bond yields of Italy and Spain. These are actually among the higher bond yields in Europe right now.
Leaving for the moment aside how sensible it is for the bond yields of virtually insolvent governments mired in “debt trap” dynamics to trade at less than 1.3%, one must wonder: what can possibly be gained by pushing them even lower? Does this make any sense whatsoever?
Meanwhile, the ECB let it be known that it wouldn’t buy any bonds with a negative yield-to-maturity exceeding 20 basis points – the level its negative deposit rate currently inhabits as well. What a relief! What makes just as little sense is that the economic outlook presented by Mr. Draghi on occasion of his press conference was actually quite upbeat.
To summarize: yields are at record lows, with about €2 trillion in European government bonds sporting negative yields to maturity. The economic outlook is said to be good. The current slightly negative HICP rate is held to be a transitory phenomenon (it very likely will be). Needless to say, the arbitrary 2% target for “price inflation” makes absolutely no sense anyway. Not a single iota of wealth can be created by pushing prices up. Last but certainly not least, year-on-year money supply growth in the euro area has soared into double digits recently.
And the conclusion from all this is that the central bank needs to boost its balance sheet by €1 trillion with a massive debt monetization program? Are these people on drugs? If not, then they should perhaps see a shrink. Perhaps the cupboards of the monetary bureaucrats are short a few plates and in need of a little pharmacological fine-tuning. Just saying.
The ECB’s balance sheet remains below the levels of 2012 as banks have repaid LTRO funds. However, the central bank balance sheet doesn’t necessarily have to grow for the money supply to soar – there is only a very tenuous (or rather, non-existent) correlation between the money supply and bank reserves. Note that with required reserves in the euro area at a mere 1%, commercial banks could in theory lever up every euro they receive in deposits by a factor of 100 and it would be perfectly fine with the ECB (chart via the WSJ) – click to enlarge.
Let’s Do More of What Isn’t Working
As you can see above, the only datum that hasn’t yet attained the lofty heights of full Monty lunacy is the ECB’s own balance sheet – however, that has obviously not kept the banks from vastly expanding the amount of fiduciary media in the economy. The ECB’s upcoming intervention should result in an acceleration in euro area money supply growth, quite possibly pushing it to new record highs in terms of the yearly rate of change.
The WSJ has has also published a summary of European “growth” (this is to say, the change rate of GDP, which is generally referred to as growth, even though it tells us almost nothing about whether or not material prosperity is actually increasing) and “inflation” (not of the money supply, but depicting the change in consumer prices). What this chart shows is that unprecedented monetary pumping and ZIRP/NIRP have had none of the effects predicted by the central planners so far. Even if they had, it would be no reason to rejoice.
read more
Coeure: ECB bought €3.2 billion in bonds on Monday
Coeure said central bank buying was much more than €25-50 million euros rumored.
The ECB and Eurozone central banks bought €3.2 billion in bonds on Monday to kick off the program. That puts to rest reports the program started with much more modest amounts. That level of buying would need to occur every day the market is open to hit the ECB's monthly target of €60 billion.
More comments from Coeure on the program:
The last comment is interesting because it would diminish the overall 'money printing' effect of QE if the assets are lent back out and the ECB holds the cash.
source
The will print much more. And nothing will change - expect the rigged data