As was the case previously, this post is divided in 4 parts:
- First, I consider the ECB’s most orthodox policy tools, the policy rates.
- Secondly, I review the structure of the ECB’s balance sheet.
- This is then followed by a more indepth consideration of the elements pertaining to different forms of direct financial market intervention,
- Lastly, I provide a brief review of the recent developments in Target2 balances.
Following these considerations, I conclude that
- The third quarter of 2015 was relatively calm for the Eurozone
- No changes in policy rates took place.
- On the liability side, the growth of bank notes stabilised
- On the asset side, QE and the LTROs remained important contributors to growth
- The ECB’s exposure to the Greek financial sector through ELA is less than 2.5% of its balance sheet.
- The PSPP continues to grow at a steady pace and, bar any other policy innovations, may end up accounting for at least 24% of the balance sheet of the ECB by September 2016.
- Greece is still not covered by the PSPP.
- Given the turbulence in Greece, this stability is consistent with the improved strength of the EZ due to the extensive tools at the disposal of the ECB and the fire-power it endows it with.
- Continued QE did not erode the exchange rate value of the Euro any further.
Policy Rates: The Deposit Facility Stays Negative
No change was made to the policy rates of the ECB. The deposit rate remains in negative territory, while the MRO and the MLF remain positive.
Structure of ECB Balance Sheet
On the asset side, the Balance sheet of the ECB continued to grow without any particular change to the trends observed in the previous period. The increase in bank notes witnessed in the beginning of the year has not been replicated recently,
The most volatile contributions to the balance sheet were “long term refinancing operations” (LTRO) in the beginning of the quarter and “claims on euro area residents denominated in foreign currency”
As a result, at the end of October 2015, around 24% of the Balance sheet of the ECB was gold (13.15%) and claims on non-Euro area residents (10.83%). The single largest account remained the “Securities Held for Monetary Policy Purposes” which crossed the 25% mark on the week starting on October 12th. This is a trend that will continue as long as QE, in the form of the PSPP, lasts.
“Other claims on euro area credit institutions denominated in euro” which also contains the Emergency Liquidity Assistance (ELA) to Greece accounted for less than 20.5% by the end of October 2015. Although the majority of the ELA support to Greece occurred during the first half of 2015, when the country dithered on the negotiations and on the referendum, the stabilisation did not produce a significant decrease in the amount of ELA being sent to the country.
On the liabilities side, the message from the ECB remains one of continuity in relation to the previous quarter. No innovative policy has been necessary and the order of relevance of the liability accounts remains the same as before.
The slight decrease in banknotes in circulation seems to have been taken up by an increase in Current Account deposits by financial institutions. Both the “revaluations” and “other liabilities” accounts fell while the deposit facility almost doubled.
The main change in the behaviour of liabilities was an end to the volatility shown by cash creation which had been experiencing burst since late 2014. Otherwise there do not seem to have been any particularly significant volatility in the composition of the ECB’s liabilities.
Securities Held for Monetary Policy Purposes
Deconstructing the asset purchases of the ECB makes clear the important impact already highlighted by the Public Sector Purchase Programme (PSPP), which continues its relentless growth, while the assets acquired by the first and second covered bond programme (CBPP1 and CBPP2) and by the securities market programme (SMP) continue to dwindle.
The Old Programmes: SMP, CBPP1 & CBPP2
There is little to say about the old Securities Market Programme and the first two instances of the CBPP, other than that they continue to be slowly winded down. While this may appear insignificant, the steady decrease of the SMP together with the details of other quantitative easing, is quite telling of the ECB’s willingness to leave Greece to bargain its bailout with other heads of state. Clearly the ECB is not available to provide any assistance other than ELA to Greece. Given the strength of other tools, this implies a relatively high premium for the country on its inability to reach an agreement with other EU countries.
The New Programmes: PSPP, ABSPP & CBPP3
With regards to the active QE programmes, which the ECB uses to inject EUR60bn per month in the EZ economy, the Asset Backed Security Purchase Programme (ABSPP) continue to progress steadily. The last week of October provided some of the largest single interventions in this market, witnessing the first single week of purchases exceeding EUR1bn.
Despite the rise of the ECB’s holdings above EUR5bn, the opposite trend seems to be the case for the latest instalment of the CBPP, where purchases seem to have been falling.
Last but not least, the PSPP continued growing at an approximate average pace of EUR11bn per month. With over EUR380bn to its name the programme now accounts for up to 14.49% of the ECB’s EUR2.65tn assets. This figure is only expected to rise. Assuming it continues to represent around 80% of all new asset purchases (ABSPP+CBPP3+PSPP) the PSPP could account for between 24%* or 27%** of the ECB’s assets by the end September 2016.
The purchases of the PSPP are distributed across the different EZ countries according to their ECB capital contribution key, which give France, Germany and Italy the brunt of the purchases. The focus of government security purchases continues to be on the medium-to-long term between the 6-year and 12-year bracket.
An honourable mentioned should be made with regards to Cyprus and Estonia, which have now been included among the countries benefiting from PSPP. Greece, due to all its turbulence continues to not receive much need assistance from the ECB, which is available to an economically troubled but more politically stable country like Portugal. As a result Portugal’s 10-year debt is trading at a 2.6% while Greece’s is trading at 8%.
Target2 Balances Continue to deteriorate
The chaos created by the difficult negotiations for the third Greek bailout in the aftermath of Greek elections, culminating in yet more elections in September, continued to erode the convergence of net creditor positions that had been achieved following the OMT announcement of the ECB in Septemnber 2012.
The third quarter of 2015 was very stable for the ECB, despite growing economic concerns about China and instability in Greece.
Despite the unprescedented QE, the devaluation the currency experienced simply reflecting an increase in supply rather than any loss of market confidence in the Euro.
The ECB also appears to have taken a step back from the Greek bailout negotiations, referendum and election, with only very limited exposure to events through ELA. Without neglecting the political discrepancies between the two countries, the 540bps spread between 10yr Portuguese and Greek bonds and the 200bps spread between Portugal and Germany hint at a relatively strong effect of QE in the EZ.
In the still uncertain waters navigated by the global economy and regardless of moral concerns, these two facts should inspire investor confidence and unity amount the present Greek and the incoming Portuguese governments.
* Note 1 on forecasted shares of PSPP-to-All ECB Assets:
This value is computed as
- 24% = EUR912bn/EUR(1140+2650))bn, where
- EUR912bn=Final PSPP = 0.80*EUR1.14tn = 0.80*EUR60bn*19months
- Note that this scenario whereby the ECB’s has assets worth ar0und EUR3.79tn by Sept 2016 is tantamount to an average 0.747% weekly growth rate between now and then)
** Note 2 on forecasted shares of PSPP-to-All ECB Assets:
This scenario assumes that the balance sheet continues to experience average its average weekly growth of 0.49% for 48 weeks from now. The calculation is approximately
- 27% = EUR912bn/EUR3355bn
- EUR3355bn=EUR2653*((1+0.0049)^48) = Total Assets Sept 2016
- 48 = Number of weeks remaining between now and the rest of the PSPP