This Might Be the Biggest Problem With the ECB’s Plan to Buy Corporate Bond Debt – Bloomberg
April 28, 2016 \ 9 Comments
Full Article: Bloomberg
As the ECB can own 70% of any corporate bond issue, any signs of deterioration in a given company’s credit profile could spark severe dislocations in the market for its debt.
The ECB is now printing money to fund corporates, with its simultaneous QE and corporate bond purchases.
This is intellectually and morally bankrupt but the corollary of 8 years of Western central bank policy.
The article’s points about idiosyncratic credit events causing central bank selling are the immediate story. The real story is that the realization of the start of this post, i.e. this is beginning of the end for New Normal. As JP Morgan rightly said after 1907, banking is about confidence. The ECB is excessively stretching incredulity.
“Those very rating agencies that were hammered for not being impartial in the subprime and Lehman crises. So now the biggest bank of them all has put its own balance sheet at risk in the most incredible way, jumping into bed with the devil, so to say!” What more do we need to consider? The ECB continues to paint themselves into a corner. The markets have a knack for sniffing out weaknesses and exploiting them, and this action doesn’t seem to have a exit plan. The “well do whatever is necessary” promise is alive and well in governmental intervention into… Read more »
Wolfman nailed it……’we will do whatever is necessary’ is a pretty bold statement and when it was first made the market felt safe. A few years on and it just sounds like the best known quote of a fading movie star.
I wonder what happens when the ECB has to sell (irrespective of an event). Anyone have an idea of who is going to step in?
There is no one to buy if the ECB sells. This was my point. Beyond the moral hazard of printing money to buy corporates no one else can compete.
At some point, the music will stop. Central bankers will need to stop kicking the can down the line. While the ECB *could* buy up to 70%, I’d bet that they will only do so if absolutely necessary. Things will need to deteriorate materially in markets in order to warrant 70% purchase of a deal. More than likely, the ECB will provide a widespread and gentle buoy to the market. Maybe I’m more hopeful than anything, but if they are actually taking down 70% of a deal, we have bigger issues. If so, make sure to have a stockpile of… Read more »
Good comments as always guys/gals. The ECB is going to be paying through the nose for overpriced assets since it has told everyone that it is going to buy these (information leakage 101) and unless they hold them to maturity, good luck selling them (information leakage 102). European investors and banks must be salivating at the potential opportunities this could create. And the ‘forced selling’ based on ratings changes, even better! Maybe huge money making opportunities develop here. Something else not mentioned here but I believe in a related article, also by Bloomberg, is that the ECB will participate in… Read more »
This article does a solid job of pointing out a few of the potential issues that ECB corporate bond buying could cause, but there is so much more to discuss if we look at the actual problems that these policies have generated. The seeds of this poor strategy are planted in a basic misunderstanding of how markets work. The central banks clearly think that bond buying programs add liquidity to financial markets the same way that adding oil to the gears of a car would reduce engine friction. In reality, the effect of central bank bond buying is akin to… Read more »
This very much resonates with me. Not only has their intentions to buy rendered fundamental credit analysis useless, but their intentions to potentially be the largest seller in a given issue equally exacerbates the issue. One one hand, the ECB buying further constrains liquidity, but their selling is the one-two punch that could cripple the market. What exactly constitutes the criteria for them selling? With a money manager or insurance company, etc; you know what their intentions are; but the ECB???? This is a bad path and I think it ends badly. “The nine most terrifying words in the English… Read more »
Funny when BUBA did this for Covered Bonds all hailed this initiative alas BUBA struggled to find secondary market liquidity, pricing & thus struggled to achieve what they set out to help. THey approached several platforms to get more secondary trading, but none of the banks wanted to play.
Blackrock’s Richard Prager: The Liquidity Is Out There – Institutional InvestorMarch 18, 2016
Everyone is Worried About the Thing Markets Need Most, But They’re Not Asking the Right Questions – Business InsiderMarch 25, 2016
US Companies Overpaying for Bonds; Banks May Be to Blame – ReutersMarch 31, 2016