EC Preliminary Thoughts About The ECB And Corporate Bonds

The targeted long-term repo operations had not even been launched when the ECB announced its intention to buy asset-backed securities and covered bonds.  It then began to buy covered bonds before the conclusion of the Asset Quality Review and bank stress tests.

This insistence on putting the proverbial cart before the horse fosters an environment that lends itself to speculation of even more measures. In addition, comments some official comments appear to express skepticism over the efficacy of current measures. This is different from the well-known German objections, which are rooted not so much in efficacy as in the moral hazard issues. 

While reports that the ECB may add corporate bonds to its asset purchases have been played down, it may be hard to shake the general idea that the ECB is likely to do more than it has already announced.  Under one view, the ECB is acting like Churchill quipped about Americans (that they can be counted on doing the right thing after exhausting the alternatives).  Eventually, they say the ECB will exhaust the alternatives and adopt genuine quantitative easing.

This seems to be a rather harsh judgment.  It presupposes that quantitative easing can is only about sovereign bonds.  To do so, it distorts the complex reality of the recent experience.  Two points are worth considering in this context.  First, the Federal Reserve did not call its Treasury and MBS purchases “quantitative easing” but rather “credit easing”.  Second, the BOJ, who appears to have coined the phrase “quantitative easing” is currently engaged in buying a range of assets that include commercial paper, corporate bonds, ETFs and REITs.  The Swiss National Bank did not buy domestic bonds (too small of supply) and instead bought foreign bonds.

Nevertheless, many investors are skeptical that sufficient easing of monetary conditions is possible through the TLTRO and the ABS/covered bonds purchases. This failure of the ECB to earn the credibility of investors leaves it in an unstable situation by not adequately anchoring expectations.