The ECB’s Corporate QE Revives an Old Hazard.Six years late the European Central Bank was to the global quantitative-easing party, but it is now at the cutting edge of monetary stimulus.
In March this year, the central bank announced its decision to buy eurozone corporate bonds, adding to its sovereign- bond buying program, which has been active since early 2015.
Even during the worst days of the eurozone sovereign debt crisis, the ECB’s critics said that buying up government bonds would discourage countries from implementing necessary reforms, a problem referred to as “moral hazard.” Why bother to make hard choices, critics argued, when debt financing is cheap?
Those arguments against QE seem to have gone out of the window for the ECB’s corporate-sector purchase program. The details of the plan were revealed on Thursday.
[expander_maker more=”Διαβάστε περισσότερα” less=”Διαβάστε λιγότερα”]Some of the controls brought in to limit the large-scale purchases of sovereign bonds have translated onto the corporate stage. In both cases, the securities have to be investment grade, and nothing with a maturity above 30 years will be bought. In any case, there isn’t much corporate debt with a maturity that far in the future.
But other parts are different. For sovereign debt, the per-issue limit was set at 25%, meaning the ECB would buy no more than a quarter of any eligible bond. In March this year, the maximum share was increased to 33%.
In corporate bonds, the initial issue limit is far higher, at 70% of any individual bond.
What is more, the ECB has refrained from entering the primary sovereign-bond market—buying debt directly from the countries issuing it—because that would violate the European Union’s rules prohibiting direct financing of government deficits by central banks.
No such restraint exists on the corporate-bond purchases. The ECB is planning to purchase company bonds in the primary market, since that is the only way that it can get its hands on significant volumes.
The ECB’s sovereign QE program is also deliberately limited by linking it to the so-called capital key of the issuing countries, a measure of each nation’s population and economic size. For the corporate-sector purchases, no such limits exist, and some countries dramatically outweigh others.
ENLARGEFrance, for example, contributes 14.2% of the ECB’s capital, but accounts for 34.9% of the eurozone-domiciled bonds on the iBoxx euro corporate index.
The Netherlands is even more overrepresented in the corporate-bond universe, with a 4% contribution to the ECB’s capital, and 26.9% of eurozone-issued bonds in the same iBoxx index.
These countries’ corporate sectors are also some of Europe’s most indebted already. French nonfinancial corporate debt now outstrips Spain’s as a proportion of each country’s gross domestic product, according to the Bank for International Settlements, at 124.5% of GDP.
Analysts seem confident that the ripple effect that the ECB intends to create will work, with easier financing costs for large corporations trickling down to smaller companies. In a research note on Friday, analysts at Goldman Sachs Group Inc. suggested that credit investors would move increasingly into riskier bonds, searching for “yielder” securities as the returns on investment-grade debt shrink further.
To be sure, corporate QE could be a good thing for eurozone financing costs.
What has been less widely discussed is whether it is a good thing for the primary recipients, and whether some of Europe’s relatively highly leveraged corporations need more excuses to issue debt.
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