When it comes to quantitative easing, the European Central Bank may be trying to bite off more than it can chew.
The ECB is now buying seven times more bonds than the euro-area governments are adding to the market, according to calculations by Deutsche Bank economist Torsten Slok. To put it into perspective, Bank of Japan’s bond purchases currently outstrip new issuance by a factor of three. The demand coming from the Federal Reserve hasn’t exceeded supply since around mid-2002.
In general, Deutsche Bank estimates that because of the central-bank activism roughly $8 trillion of global debt is trading at sub-zero rates. That’s roughly 17 percent of all the world’s outstanding bonds.
“This reveals how much additional ‘firepower’ each central bank brought to the market in an attempt to lower long rates and narrow credit spreads and boost stock markets,” Slok says in his note. The “difference in QE magnitude across the G3 is an important reason why the ECB exit is likely to be a much bigger event for markets.”
In the ECB’s case, the asymmetry has been exacerbated by attempts from some of the euro-area largest economies to reduce their debts. Germany, which gets the biggest quota of monthly QE purchases among member states, has been running a budget surplus since 2014. In Netherlands, revenue also exceeded spending last year. Both can now issue debt with negative yields. Borrowing costs have also dropped for deficit-countries such as Italy, Portugal and Spain, allowing them to refinance debts at lower rates.
On Oct. 26, the ECB is going to lay out plans for its bond-buying in 2018. The program will reach 2.28 trillion euros ($2.7 trillion) by the end of 2017, and there may only be room for little more than 200 billion euros of purchases next year.
At the same time, the central bank is likely to maintain the large size of its balance sheet through reinvestments of it maturing bond. That should go some way to cushioning the blow from its disappearing firepower.