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8 Sep 2014
ECB ‘private QE’ impact seen as positive but no game changer - ING
FXStreet (Łódź) - Martin Van Vilet from ING presents a preliminary outlook on the impact of ECB's newly introduced ABS purchase program and the covered bond purchase program.
Key quotes
"The purchases and the TLTROs together might generate around €1tr in balance sheet expansion. Assuming a take-up of the TLTROs of up to €850bn, and taking into account the repayment of the remaining 3-year LTRO funds (€350bn) this leaves around €500bn in potential ABS and covered bond purchases."
"The initial reaction market reaction to the new ECB easing measures is promising: covered bond and RMBS spreads both fell sharply. Our Credit Strategy team thinks that the tightening in spreads has further to run and that general credit spreads may even go to 2006 lows before too long."
"In our view, the success of the ABS purchase programme crucially hinges on its ability to boost appetite for issuing and investing in the junior ABS tranches. In general, ABS issuance can only provide regulatory capital relief if issuers are able to sell a large share of the (risk on the) mezzanine or equity tranche."
"As said, Draghi has indicated that the ECB would consider buying mezzanine tranches, but only if they are backed by guarantees (which may be costly). Perhaps the tightening in credit spreads in general and ABS spreads in particular will be sufficiently large so that placing mezzanine and equity tranches would start to make economic sense again for the issuer (given the credit enhancement and the spreads on the underlying assets). But this is far from certain."
"This, and the uncertainty as to whether development banks and/or the EIB/EIF will step up their role as guarantors of junior ABS tranches, implies that it is unclear how successful this programme will be in terms of boosting new ABS issuance."
"All this being said, with these two new private sector purchase programmes, the odds of QE by the ECB through purchases of government bonds seems to have diminished, at least in the short term."
"However, with the Eurozone’s economic recovery remaining very fragile it is clearly premature to exclude the possibility that the ECB’s will ultimately have to resort to the ‘nuclear option’."
Key quotes
"The purchases and the TLTROs together might generate around €1tr in balance sheet expansion. Assuming a take-up of the TLTROs of up to €850bn, and taking into account the repayment of the remaining 3-year LTRO funds (€350bn) this leaves around €500bn in potential ABS and covered bond purchases."
"The initial reaction market reaction to the new ECB easing measures is promising: covered bond and RMBS spreads both fell sharply. Our Credit Strategy team thinks that the tightening in spreads has further to run and that general credit spreads may even go to 2006 lows before too long."
"In our view, the success of the ABS purchase programme crucially hinges on its ability to boost appetite for issuing and investing in the junior ABS tranches. In general, ABS issuance can only provide regulatory capital relief if issuers are able to sell a large share of the (risk on the) mezzanine or equity tranche."
"As said, Draghi has indicated that the ECB would consider buying mezzanine tranches, but only if they are backed by guarantees (which may be costly). Perhaps the tightening in credit spreads in general and ABS spreads in particular will be sufficiently large so that placing mezzanine and equity tranches would start to make economic sense again for the issuer (given the credit enhancement and the spreads on the underlying assets). But this is far from certain."
"This, and the uncertainty as to whether development banks and/or the EIB/EIF will step up their role as guarantors of junior ABS tranches, implies that it is unclear how successful this programme will be in terms of boosting new ABS issuance."
"All this being said, with these two new private sector purchase programmes, the odds of QE by the ECB through purchases of government bonds seems to have diminished, at least in the short term."
"However, with the Eurozone’s economic recovery remaining very fragile it is clearly premature to exclude the possibility that the ECB’s will ultimately have to resort to the ‘nuclear option’."