Purchase of corporate bonds: “The ECB aggressively” – Business Week

of Malte Fischer

European Central Bank will start in the next few days with the purchase of corporate bonds. The dangers for markets and taxpayers are enormous confidence in the monetary policy could now ruin definitively the ECB.

This week, the Council of the European Central Bank’s (ECB) on the road. The 25 members, consisting of the heads of central banks of the euro countries and the ECB’s Executive Board, is a meeting place as usual in Frankfurt ECB skyscraper, but meet in the Vienna Hofburg. Exceptional but this time is not only the meeting place, but also the monetary policy agenda: The central bankers will discuss in Vienna about the details of an action for vortex in the markets has been working for weeks: the purchase of corporate bonds.

The program bears the initials CSPP (for “Corporate Sector Purchase Programme”) and marks a new escalation in the monetary policy. Because in fact, it means that the ECB takes on the role of banks and investors – and in future to selected company grants loans.

ECB chief Mario Draghi announced in March, in June, it goes to the start of the project. It complements since March 2015 ongoing program to purchase government bonds, about the Euro-keepers have previously purchased securities worth almost € 800 billion. At least until next March month government and corporate bonds worth 80 billion euros are to be acquired.

The toolbox of the ECB

• the ECB heck align

  once again, all look to the Euro -Schuldenkrise banished to Frankfurt: European Central Bank (ECB) is to judge it in the worst case, intervene with their weapons and so calm the markets.

• The center of the ECB

  Although experts and central bankers argue about how effective, sustainable and meaningful further intervention of monetary policy might be. One thing is certain: the ECB has the only institution on a well-stocked and theoretically immediately available toolbox to grab ailing banks under the arms to protect banks in the event of bank runs with new money and their financial firepower least for a limited time to worry again for rest on the exchanges.

• liquidity salvos of the financial system

  before election day in Athens there are increasing indications that the major central banks of the world make common cause and the markets could fill in with money. Such concerted action by central banks, there was already – the beginning of October 2008, shortly after the collapse of US investment bank Lehman Brothers, the world’s financial flows threatened to dry up.
  In the current crisis around the indebtedness of Greece and other southern European countries has not only announced the BoE to its banking sector to protect against spilling from Greece problems, together with the finance ministers in London will flood 100 billion pounds. On Friday, the prospect of a joint central bank intervention initially caused better market sentiment.

• lowering the key interest rate at 0.75 percent

  Currently is the key ECB interest rates at 0.75 percent. The central bank can of course always turn to this most important in normal times screw. It would be a historic step: Never since the foundation of the monetary union, the key interest rate was for the supply of the financial system with fresh low liquidity.
  However accepts the scope of the ECB from having any further rate cut – finally a backdrop the zero line inevitably closer. Experts expect that the central bank with more rate cuts as long waits as possible to have in the event of real turmoil in the financial, as would be expected from the Euro-zone as in a withdrawal of the Greeks, nor ammunition.

• lowering the deposit rate to zero

  in order to revive the money market and encourage banks to give more money in the economic cycle, the ECB could the so-called deposit rate to zero percent hats. This interest rate is currently at 0.25 percent. This means that banks, trust like no other bank more, after all, still get money for it, if they park excess liquidity with the ECB. With a deposit interest rate of one percent of the incentive to do so would remove. But whether the banks the ECB oblige or hoard the money rather then, is questionable. Currently they park anyway almost 800 billion euros in Frankfurt.

• Other long-term refinancing of banks

  in December and February, the ECB has succeeded, with two each three-year refinancing operations the minds of bankers, at least for a time to calm long. At that time, the financial institutions secured a total of around one trillion euros at the central bank on the cheap by only one percent.
  Some experts believe that more long-dated transactions of this kind could return the undermined by the uncertainty about the future of the Euro-zone confidence. The banks that have operated at the turn of the ECB are, however, already secured until at least the end, 2014. In addition, each bank can draw on unlimited resources at the weekly main refinancing operations of the central bank beyond.

• more relief for the banking system

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  So the banks do not run out of collateral that must make this pledge for refinancing operations with the central bank , the ECB may decide further reductions for the requirements. You can also proceed selectively to countries to targeted help. However, the facilitation of the collateral is always a political issue because it risks rise, the central bank accumulates by refinancing their balance sheets. Just in case, this would have to be borne by taxpayers of member countries.

• Re-start the government bond purchases

  the ECB has purchased since May 2010 government bonds of highly indebted euro countries for more than 200 billion euros. The jargon in SMP (Securities Markets Programme) said program is controversial because of its potential side effects in Germany and several other northern and central European countries. There are currently suspended, but may at any time be set by the Governing Council in force again.
  Whether it but still can exert its expected beneficial impact on the bond market is unclear. Because of the experience in the restructuring of Greek debt in the spring a few private investors such as banks or insurance companies are likely to follow the ECB and go back into the market because they fear that the central bank could enforce a special status as a believer again as it did in the case of Greece .

• Additional purchase of other securities

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  in theory, the ECB next buy government bonds, other types of securities and thus create money: for example, bank bonds, equities and corporate bonds. During the purchase of bank bonds would be an imminent possibility to provide liquidity to the banks, other ways seem very promising. So the ECB could well explain bad, why it buys about shares of banks, but not by car or chemical groups. Or she sits down to suspicion, the buy out a bank more shares than others or, for example, Spanish Institute German or Austrian banks preferable.

• Further reduction of the reserve requirement

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  in theory, the ECB also their requirements for the minimum reserves of banks that need to keep at it, lower it. She has already done so at the turn and halved the rate of its total deposits, which each commercial bank must park at her from two to one per cent. This time she had cleared a total of around 100 billion euros for the banks. Such a move would make it easier for banks in Europe, which would probably suffer most under a capital flight, easier to keep funds liquid.

the aim of the CSPP is to push prices of corporate bonds up and their yields down. This should stimulate investment, economic growth and inflation. The program’s success is questionable. Because of cheaper liquidity prevails currently no shortage, rather of confidence in the monetary policy. This but the ECB could now ruin final. Because the purchase of corporate bonds they distort the conditions of competition in the credit markets, exacerbated the investment crisis for private investors and builds on its balance sheet multibillion risks for taxpayers.

economists have long been demanding, banks should establish risk prevention for their government bonds. However, the policy is still hesitating. Why is that?

If you had ten years ago predicted that the ECB buys one day large-scale government and corporate bonds would, you have probably dismissed as a fantasist. But in the wake of the debt and euro crisis, the band led by ECB chief Draghi, almost all monetary policy taboos that existed until then cleared. First they lent the banks central bank money without end to Billigstkonditionen, then they bought them covered bonds and securitization from, then they widened their purchases on government bonds. Now they go on the market for corporate bonds on a shopping spree.

After the Council meeting on Thursday, the ECB is likely to reveal more details about the proposed purchase of corporate bonds. What do the central bank purchases for investors and which will be important at the meeting.

That there is a large shopping showing details of the program. “The ECB aggressively,” says Marco Stöckle, Head of Corporate Credit Research’s Commerzbank. Thus, the ECB euro-denominated bonds with maturities of between six months and 30 years targeted. Up to 70 percent of an issue (for public companies up to 33 percent), they want to draw. Executed purchases of six national central banks, including the German Bundesbank.