ECB Bond-Buying Tweak Is Less Than Meets Eye, ABN Amro Says

  • New parameter to benefit government debt sold before 2013
  • Market liquidity could dry up more for older securities

European Central Bank President Mario Draghi sparked a rally in euro-area government bonds Thursday when the ECB increased a cap on the amount of securities it’s able to buy under its stimulus program to 33 percent from 25 percent. To ABN Amro Bank NV, this is no game changer.

That’s because the increase is only likely to be applied to bonds that were sold before 2013 as they had no collective-action clauses, according to Kim Liu, a fixed-income strategist at ABN Amro in Amsterdam. Draghi revamped the parameter of the ECB’s quantitative-easing plan to allow for more purchases of bonds as the weaker global outlook prompted a reduction of officials’ economic forecasts through 2017.

CACs are designed to make a debt exchange that is accepted by a qualified majority of bond holders binding to all, limiting investors’ rights to oppose writedowns on the securities. In accordance with a treaty establishing the European Stability Mechanism, the permanent rescue fund set up after the euro-area debt crisis, all bonds sold by governments in the region since Jan. 1, 2013, must have the clauses attached.

“From a big picture perspective, raising the cap by 8 percentage points is not a game changer,” said Liu. “This could mean that liquidity could even dry up more for these so-called legacy bonds.”

‘Case-by-Case’

The increase in the limit for purchases of each bond issue is subject to “a case-by-case verification” of the circumstances involved, Draghi said in Frankfurt Thursday after the central bank’s policy meeting. It should not create a situation whereby the ECB would have blocking minority power, in which case the issue share limit would remain at 25 percent, he told reporters.

The ECB started its 1.1 trillion-euro ($1.2 trillion) QE program in March to stave off the risk of deflation in the region and said it intends to keep buying bonds until September 2016. Hardly half-way through the project, it already faced a potential shortage of securities as a lack of net issuance by governments is curtailing the availability of bonds that are eligible to buy.

European government bonds rose on Friday, with Germany’s climbing for a fourth day.

ABN Amro now sees additional QE as its base-case scenario and predicts more bond purchases probably will be announced before the end of this year, according to its research notes that followed the ECB’s decision.

Recent data show that the 19-nation euro-area economy is in better shape than it has been for years. Yet the economic rebound hasn’t translated into sturdier consumer-price growth, a problem that’s affecting almost every major central bank. To ward off the risk that low inflation expectations morph into assumptions of low growth for the long term, Draghi underlined policy makers’ willingness to keep buying public-sector assets until the strategy has achieved its goal.

European Central Bank President Mario Draghi sparked a rally in euro-area government bonds Thursday when the ECB increased a cap on the amount of securities it’s able to buy under its stimulus program to 33 percent from 25 percent. To ABN Amro Bank NV, this is no game changer.

That’s because the increase is only likely to be applied to bonds that were sold before 2013 as they had no collective-action clauses, according to Kim Liu, a fixed-income strategist at ABN Amro in Amsterdam. Draghi revamped the parameter of the ECB’s quantitative-easing plan to allow for more purchases of bonds as the weaker global outlook prompted a reduction of officials’ economic forecasts through 2017.

CACs are designed to make a debt exchange that is accepted by a qualified majority of bond holders binding to all, limiting investors’ rights to oppose writedowns on the securities. In accordance with a treaty establishing the European Stability Mechanism, the permanent rescue fund set up after the euro-area debt crisis, all bonds sold by governments in the region since Jan. 1, 2013, must have the clauses attached.

“From a big picture perspective, raising the cap by 8 percentage points is not a game changer,” said Liu. “This could mean that liquidity could even dry up more for these so-called legacy bonds.”

‘Case-by-Case’

The increase in the limit for purchases of each bond issue is subject to “a case-by-case verification” of the circumstances involved, Draghi said in Frankfurt Thursday after the central bank’s policy meeting. It should not create a situation whereby the ECB would have blocking minority power, in which case the issue share limit would remain at 25 percent, he told reporters.

The ECB started its 1.1 trillion-euro ($1.2 trillion) QE program in March to stave off the risk of deflation in the region and said it intends to keep buying bonds until September 2016. Hardly half-way through the project, it already faced a potential shortage of securities as a lack of net issuance by governments is curtailing the availability of bonds that are eligible to buy.

European government bonds rose on Friday, with Germany’s climbing for a fourth day.

ABN Amro now sees additional QE as its base-case scenario and predicts more bond purchases probably will be announced before the end of this year, according to its research notes that followed the ECB’s decision.

Recent data show that the 19-nation euro-area economy is in better shape than it has been for years. Yet the economic rebound hasn’t translated into sturdier consumer-price growth, a problem that’s affecting almost every major central bank. To ward off the risk that low inflation expectations morph into assumptions of low growth for the long term, Draghi underlined policy makers’ willingness to keep buying public-sector assets until the strategy has achieved its goal.

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