ECB secret QE, or not? | FT Alphaville

ECB secret QE, or not?

Edward Hugh pointed us towards an interesting ECB factoid at A Fistful of Euros this week: Net purchases of euro area government bonds by ECB Monetary Financial Institutions (MFIs) totalled €217bn between October 2008 and April 2009.

In his post, Hugh wonders if the above might be indicative of the ECB effectively conducting expansionary fiscal policy — along the lines of quantitative easing — by buying a large proportion of this newly created debt in its long-term financing operations.

Outright purchases of euro area debt by the ECB’s MFIs are part of the central bank’s credit operations. However, to date they’ve only been buying mortgage-backed securities as part of those operations — and explicitly not government bonds, outright. You can read more about the ECB’s credit easing operations here.

In any case, the ECB pointed out in its bulletin:

This entirely reversed the net sales of €191 billion observed between December 2005 and September 2008 in the context of rising short-term interest rates.

That u-turn is helpfully illustrated in the following ECB chart:

MFI net purchases - ECB

Of course, the ECB explains that this sort of switchover is entirely normal in the context of falling interest rates. As they put it:

As Chart A shows, situations in which purchases of government debt securities and short-term interest rates move in opposite directions are a regular feature of the interest rate cycle and essentially reflect the impact that changes in short-term interest rates have on the slope of the yield curve, as measured by the spread between the yield on long-term government bonds and short-term money market interest rates.

We decided to seek some further comment on the matter from Laurent Fransolet at Barclays Capital, who supplied us with the following two charts — the first providing a nifty breakdown of who was buying how much and when, the second showing ECB funding for each country:

MFI buying of government debt is slowing down - Barcap

ECB funding - Barcap

As can be seen the overall trend in the period was that MFI government bond purchases, everywhere bar Spain and Portugal, were slowing into July.

In the case of Spain specifically, there was a somewhat sudden acceleration in purchases in June, followed by a not insignificant fallback in July.

While Fransolet agreed these sorts of MFI purchases were big, he added the sums could be considered normal for this stage in the cycle. As he explained in an email to FT Alphaville:

…they were starting from a low base (see chart), they have to rebuild such holdings for regulatory reasons and the ratio of govt debt vs total assets is still very low. In addition, the yield curve is very steep, and that is typically associated with buying of government debt by banks (as the ECB itself has noted; if anything, the latest data does not suggest that the buying is outsized given the steepness of the curve). Banks ride the yield curve all the time, and that is how they recapitalize themselves.

But as he also noted with regard to Spain and Greece — with reference to the above charts (our emphasis):

Saying that, it is clear that some of this does end up being financed at the ECB...

There have been increases on all counts, but it is not straightforward at all to link the two charts. In fact, I suspect a lot of the funding at the ECB has been done using other types of collateral than government debt (as is evidenced by the ECB own stats on collateral usage, even if recent ones are not available). More likely, people use illiquid paper for their funding at the ECB, much more than government paper, which can be funded in the repo markets.

The one country where the link with government bond funding at the ECB is one of the more apparent is probably Greece:
the reliance on ECB funding by Greek banks has increased a lot, and this has been to support an expansion of balance sheets (rather than replacing other sources of funding), this expansion being mainly because of greek government bonds being bought!

Spanish banks have bought the most gov debt recently, gobbling up a lot of the Spanish treasury net issuance YTD, but it is more difficult to make a clear link with ECB financing (the reliance on which has increased only very recently, with the 1y LTRO).  

Related links:
There Is Another Shoe To Drop In The Global Economic and Financial Crisis – And The Focus Will Be On Europe’s Perifery [sic]
– A Fistful of Euros
Trichet on the ECB’s rubbish assets
– FT Alphaville
The mystery box – FT Alphaville