ECB sovereign bond programme step in right direction, fund managers say
07 Sep 2012
EUROPE - The European Central Bank's move to launch a new sovereign bond buying programme is a positive step towards solving the euro crisis, but risks remain, according to asset management analysts.
Azad Zangana, European economist at Schroders, said: "The ECB has taken another step in the right direction, but is still some way away from totally removing the tail risks that investors fear."
The ECB left its key interest rates unchanged at their current low levels at its monthly meeting yesterday, but announced it was resuming its programme of outright monetary transactions (OMT), as the bond-buying action is formally called.
The action, which is meant to cut the borrowing costs of struggling euro-zone countries, will be taken only on condition that the countries involved agree to an adjustment plan.
ECB president Mario Draghi said there were no limits on the size or duration of the buying, and that only one member of the governing council had dissented.
Zangana said: "While the ECB has found the big gun in bond buying, it is missing the ammunition to make a long-lasting positive impact on markets."
Although the OMT would not have an explicit limit, there was a serious flaw in its design, he said.
"The ECB's insistence to sterilise the bond purchases means the ECB can only buy bonds as long as demand for euro T-bills remains - the sale of which absorbs the liquidity released by the bond purchases," he said.
If demand dried up as it did for then, the bond purchases would be halted.
"In that sense, Draghi may be overreaching when he said the ECB would 'backstop' the monetary union," Zangana said.
Johannes Müller, chief economist at DWS Investments, said the ECB's move was positive because it was tackling a major defect of the European monetary union.
"We have been witnessing an increasing divergence of monetary conditions within member countries," he said.
"Interest rates for the private sector have decreased in economically robust countries, while they have risen in weak countries, which are already suffering from fiscal austerity programmes, high unemployment and so on."
Diverging government bond yields had definitely contributed to this trend, he said.
"So, by forcing a re-convergence in government bond yields, the ECB is also trying to engineer a re-convergence of interest rates for the private sector," he said.
But if the ECB had not decided to act, Müller noted, it would have been up to euro-zone politicians to fix the problem.
"Bluntly speaking, taxpayers were spared, but now savers have to foot the bill by accepting artificially low interest rates," he said.
Daniel Murray, chief economist at EFG Asset Management, said the move was an important step towards resolving the European debt crisis.
"In conjunction with expected Fed and actual Bank of England action, this has been supportive of financial markets," he said.
One of the features of the new OMT, is that the central bank itself will be treated the same as other bondholders with regard to seniority.
"This should increase the attractiveness of peripheral debt to the private sector," Murray noted.
"When Greece defaulted earlier this year, the ECB received payment in full while other bond owners had the value of their debt marked down meaningfully."
Peter O'Flanagan, senior foreign exchange trader at Clear Currency, said the sell-off during Draghi's press conference yesterday showed the central bank had opted the keep the stimulus that fed speculators' short-term appetites, but nothing further.
"The single currency recovered, however, and for now is riding the wave higher as the ECB's bond purchase programme eases the strain on yields and reduces the cost of funding for struggling nations, thus removing one major facet from the European financial crisis," he said.
But O'Flanagan said his team still had reservations on how effective the OMT would be in the long term because the conditionality attached and lack of detail on its implementation could cause more concerns.
Stefan Angele, head of investment management at Swiss & Global Asset Management, noted that the ECB's latest bond buying programme was different from its previous two.
Not only was it unlimited and transparent, but the countries involved would also be subject to a strict and effective conditionality.
"The ECB reserves the right to end bond purchases if governments do not fulfil their part of the bargain," he said.
Francois Chauchat, market economist at GaveKal Research, described the bond-purchasing plan as essentially a way to bypass the German opposition to providing a banking license to the size-limited ESM (European Stability Mechanism) bailout vehicle.
"It does this through conditional but potentially unlimited ECB purchases of short-dated government bonds.
"By focusing on the short end of the curve - 1-3 years - the ECB complies with the idea of temporary support dear to the Germans and the Bundesbank, while ensuring the financial sector will be supported by steeper yield curves," he said.
In addition to this, the ECB was easing collateral rules for refinancing operations, especially for the countries under the EU-IMF assistance programs, he noted.
Chauchat said the OMT did not represent a quantum leap in the euro crisis, but did add to a series of incremental improvements in the management of the crisis.
These included the German concessions at the latest EU summit in June, the recent return of Ireland to the primary bond market and the sharp improvement in liquidity conditions brought about by the larger and more flexible refinancing operations.
Author: Rachel Fixsen