The European Central Bank begins buying corporate bonds on Wednesday, hoping to convince companies to borrow and spend, in its latest effort to revive rock-bottom inflation in the euro zone.
Adding investment-grade euro credit to its €1.74 trillio of asset purchases, the ECB hopes to cut borrowing costs even more. That would give companies incentive to invest, fuelling faster growth in the bloc, still struggling to overcome the last stages of its debt crisis.
The programme will face serious obstacles. The market for such debt is worth €500 billion to €600 billion, but it is largely limited to big companies in France and the Netherlands. They already enjoy easy access to credit, so their interest in the cheap cash may be limited. Success will largely depend on the ECB’s ability to attract new borrowers and on cheaper borrowing costs trickling down to weaker economies like Italy’s and Spain’s, where costs remain high.
"At this stage, the ECB itself is probably not sure how much it will be able to buy," Deutsche Bank analyst Michal Jezek said. "For example, we could see some strong months with €9 to €10 billion of purchases and others, such as August, with say €1 to €2 billion, with most months somewhere in between." Jezek expects record euro debt issuance this year, with €250 billion in gross and more than 100 billion in net sales. About half the net figure will come from euro zone corporations, responding to the ECB's purchases.
The ECB will not set purchase targets and is likely to start slow, prepared for big fluctuations and ramping up over time. It will hope to buy €5 billion to €10 billion a month if it succeeds in inducing fresh issuance, sources close to the ECB told Reuters earlier. If meaningful new issuance fails to materialise, volumes may be limited. Some euro zone sources argue that buys might hold between €2 billion and €3 billion per month.
The ECB is buying €80 billion euros worth of assets, mostly government debt, per month, at least until March 2017. But the failure of inflation to accelerate is expected to force the bank to extend the purchases. That would increase the risk it would struggle to find assets to buy, running into liquidity shortages or the constrains of its self-imposed limits. Although analysts expect the ECB to be heavily involved in the primary market, its commitment to buy proportionally to outstanding issues will force it to also buy in the secondary market.
“The timing (of the start) suggests that the ECB is well aware of making the best of the purchase period ahead of the summer lull,” Morgan Stanley said in a note. “We expect the average pace over the life of the corporate sector purchase programme to be €3-€5 billion per month, across primary and secondary (markets).”
Reuters
