- If the self-imposed constraints of the ECB’s quantitative easing programme are respected, we estimate that the ECB will run out of eligible German Bunds (and German state and agency debt) to buy by mid to late 2018. We see this as the perfect excuse the ECB has for an early tapering of QE, as the Eurozone recovery consolidates.
The ECB’s Quantitative Easing program, otherwise known as the Asset Purchase Program (APP), has often met with stiff opposition from some of the more conservative minded forces in Europe who see this as a threat to monetary and financial stability in countries that, in their view, do not need additional monetary stimulus over and above the record low interest rates they currently enjoy . They have a point, but, crucially, will the fact that the ECB may run out of eligible bonds to buy in the not too distant future do their work for them? In other words, will the ECB be forced to taper, or change the self-imposed rules of the APP in light of the above?
The current APP is comprised of the following:
Why? We estimate there are EUR 861.5bn of eligible central government German bonds, EUR 150.9bn of eligible German agency bonds and just over EUR 535.1bn of state debt (Länder). Adding all this up gives EUR 1547.5bn of eligible bonds and thus only EUR 510.7bn of eligible German securities to buy after applying the 33% issuer limit. The ECB currently owns EUR 368bn of German government debt (23.97% of total PSPP net purchases) and if it continues buying the EUR 42.3 bn allocated to the PSPP programme according to the Bundesbank’s capital key (17.99%), it gives them up to a maximum of 18 months before the ECB owns the remaining EUR 142.7bn of eligible German securities it scan still buy. Naturally this is an upper bound estimate of the limit: the ECB cannot own more than 33% per issue, for which 33% of total debt stock is a necessary but not sufficient condition. Unfortunately, the ECB does not provide data on how much of each bond it holds, so this is the furthest we can go.
The PSPP program is constrained by various factors, the two key ones being 1) the 33% max limit per issuer for all non-supranational bonds (applied to the universe of eligible assets in the 1 to 30-year range of residual maturity) and 2) the fact that “priority” will be given to purchases of assets with yields above the DFR (the current ECB deposit rate of -0.4%). These can be changed by the ECB Governing Council at any time, but the relative scarcity of German assets under current rules will become critical going forward given that we expected current constraints could be binding given the ongoing need to accumulate bunds at the rate of just under EUR 8bn per month by late 2018 at the latest.
What does this mean?
As with Fed, we believe ECB will need taper the PSPP program before it can raise interest rates to avoid violating its own rules, especially if bunds stay bid and do not move in tandem with the changes in the ECB refi rate. Furthermore, the ECB has bought itself until the end of 2018 to complete the taper, and, perhaps to embark on the first rate rise since he ill-fated rate increase rise of 2011.