Europe's "magic" central bankers apparently think they're pulling off powerful tricks to ignite the region's economy.
"We are magic people," proclaimed Vitas Vasiliauskas, Lithuania's chief central banker, in a Bloomberg News article on Wednesday, perhaps a little too proudly. "Each time we take something and give to the markets -- a rabbit out of the hat.”
Investors aren't so convinced and suspect smoke and mirrors are probably in play. They see more asset bubbles at this point than they do rabbits. The more challenging trick for central bankers at this point is to figure out how to stuff some of the rabbits back into their hats, not pull more out.
Let's take a look at one of the European Central Bank's recent tricks, and possibly the one that's shocked and awed markets most of all in the past year. On March 10, it announced a plan to start buying European corporate bonds in addition to sovereign debt as part of its monthly asset purchases. The unprecedented move threatened to overwhelm the region's $980 billion credit market, leading to worries about foolish lending practices and (even more) distorted values.
Since then, companies around the world have sold an accelerating amount of bonds. The $97 billion of corporate bonds sold globally so far this month is putting it on track for a record May issuance, according to data compiled by Bloomberg. Since March 10, company notes around the world have returned 3.7 percent, the most for a similar period since 2009.
While central banks from Japan to the U.S. are engaging in their own special brands of magic, the ECB has been the main policy driver behind the recent credit rally. It has been the worldwide credit whale, driving investors into different regions for some credit-related yield, spurring companies to borrow as much as they can in the process.
Johnson & Johnson, for example, sold 4 billion euros of bonds this week, pushing corporate-debt issuance within reach of a weekly record. Other American companies to tap the European credit market recently include Kraft Heinz and General Motors Financial.
For the most part, companies aren't raising money because they have a burning desire to invest in their businesses. Instead, they're refinancing at a lower rate and raising cheap money because, you know, why not?
The problem is that the global economy isn't growing all that much, so it may only get harder for some of these borrowers to pay back their debts. This will especially be the case if the world slips into a significant recession.
Also, it tethers the future to the past. If these companies can't modernize and adapt their business models quickly enough, they'll be forced into a painful spiral of unmanageable debt payments amid shrinking incomes.
Yes, the ECB has opened a spigot of corporate-bond issuances. Bravo. But is that magic? Hardly. Will this ignite growth? The jury's still out. Does the ECB have more "magic" it can unleash on markets? Perhaps. But the real hat trick will be figuring out how to actually create jobs and ignite growth and eventually move away from such disruptive policies. The central bank "magicians" have yet to demonstrate they've mastered those tricks.
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