Global Daily – The ECB’s QE options

by: Nick Kounis , Maritza Cabezas

Global-Daily-Insight-27-August-2014-fv.pdf ()
  • ECB ABS purchases look like a done deal, but there is more uncertainty about what else it may do
  • One possibility is  it will circumvent govies, and go for a mix of private and European agency securities
  • Bulk of US housing data shows some improvement compared to earlier this year.


Govie scheme practically easy, politically difficult

As previously discussed, it looks like a done deal that the ECB will embark on an ABS purchase programme. This programme would have a number of important advantages, but it would lack the scale and scope of ‘real QE’, which the ECB defines as a large-scale and broad based asset purchase programme. In terms of scale, the easiest market for outright purchases would be government bonds. The market for government debt securities totals around seven trillion euros. This would provide the central bank with the necessary scope. For instance, we calculate that to emulated the Fed’s QE-2 programme in the eurozone context, purchases should amount to EUR 400 bn. It would also be easy from a design perspective. As noted in previous research (please see ‘The ECB’s inflation problem’ Macro Focus, 31 January 2014), the central bank could use its capital key to divide the purchases between individual sovereign bonds. The disadvantage of such a scheme is political. Although the ECB is allowed according the Treaty to buy government bonds in the secondary market, some officials still would regard this (wrongly in our view) as blurring the lines between monetary and fiscal policy. The Bundesbank would lead the opposition. It might therefore be difficult to achieve a consensus around such a policy, unless the economic circumstances were to deteriorate more significantly.


 An option for non-govie QE

One possibility to circumvent the government bond market, but still launch QE would be an asset purchase programme consisting of a mix of ABS, European agency debt and possibly corporate bonds (a proposal for such a scheme was floated earlier this year by the Bruegel Institute). Total outstanding European Agency debt (issued by European level institutions) amounts to around EUR 550bn, debt securities issued by non-financial companies 1.1 trillion, while the ABS market totals 970bn. Given this, it could be possible to launch an asset purchase programme with an eventual target of up to EUR 200bn, without the central bank becoming too dominant. The scale would fall short of what other central banks have done, but it would be bigger than ABS alone (EUR 50 – 100bn). In addition, it could be a compromise option for the central bank, which allows it to achieve a consensus. Finally, it could also argue that the TLROs will also provide an impulse, which taken altogether will give it the necessary scope.

US housing market moving slowly in the right direction

After a new round of housing data releases, which included housing starts and permits, new and existing home sales, home builder sentiment and several measures of prices, we are seeing that the recovery in the housing market is slow, but moving in the right direction. Although most housing data is volatile, there have been some improvements compared to earlier this year. The positive forward looking indicators include the latest loan survey, which suggests that mortgage lending standards are easing, housing permits, which posted a second consecutive monthly increase in July, and the seven month high in home builder confidence in August. Meanwhile, the demand for housing measured by existing home sales showed the fourth consecutive monthly increase in July. New home sales were, however, much weaker than expected, but there were upward revisions in the previous months. The stock of existing homes (5.5 months) has been steady and that of new homes (6 months) has been slightly increasing in the past few months. June’s Case Schiller index showed home price inflation weakening, likely influenced by more homes coming up for sale. Meanwhile, June’s FHFA house price index was unchanged at 4% mom. An improving labour market should gradually support housing demand. Finally, another report released yesterday , the durable goods report was stronger-than-expected. Although the record gain on headline orders was due almost entirely to the volatile aircraft category, the details of the report were stronger on balance, consistent with other manufacturing activity surveys released in July.