TheChek News Flow

ECB PREVIEW: Sovereign QE Imminent; Size, Risk-Sharing in Focus
2015-01-20 10:51:52.879 GMT


By Stefania Spezzati and Max Julius
(Bloomberg) -- The European Central Bank is likely to
announce govt bond-buying program on Thursday to meet balance
sheet-expansion target and combat deflation threat, economists
say.
* Size and composition are critical issues, as is degree of
credit risk-sharing among national central banks
* Full details may only come in March
* Morgan Stanley flags concerns among investors that negative
deposit rate will undermine effectiveness of ECB’s QE while
Pimco said on Dec. 3 ECB should lift deposit rate to zero
* EUR may drop to a fresh multi-year low against USD if ECB
surprises market in terms of QE size, modalities of risk
sharing, strategists say
* Peripheral spreads are likely to compress further, most
rates strategists say, while disagreeing over outlook for
bunds
* NOTE: ECB policy decision is due at 1:45pm CET on Jan. 22,
press conference at 2:30pm CET
* Economists surveyed by Bloomberg expect Draghi to
announce a ~EU550b bond purchase program this week
* Draghi presented QE plan to German government, Spiegel
reported Jan. 16; ECB staff are said to have outlined
EU500b investment grade QE plan, Bloomberg reported on
Jan. 9
* Draghi presented QE plan to German government, Spiegel
reported Jan. 16; ECB staff are said to have outlined
EU500b investment grade QE plan, Bloomberg reported on
Jan. 9</li></ul>


* Morgan Stanley
* Expect ECB to embark on sovereign QE and announce
government bond purchases of EU500b and private sector
asset purchases of EU100b, economists including Elga
Bartsch say in Jan. 19 note
* A negative deposit rate makes it difficult for ECB to
meet its target merely through funding facilities as it
effectively introduces a tax on excess bank reserves
* Difficult for ECB to raise deposit rate to zero without
raising the refi rate at the same time
* Workable compromise for ECB would be a hybrid program
with a core component where financial risk is shared
across Eurosystem and an optional component relating to
national central bank risk
* Remain skeptical on QE impact because of dissent inside
the ECB, potential political backlash, legal
uncertainties on government bond buying
* Remain skeptical on QE impact because of dissent inside
the ECB, potential political backlash, legal
uncertainties on government bond buying</li></ul>


* BofAML
* Expect ECB to announce government bond buying of between
EU500b and EU700b over 18 months, analysts incl.
Athanasios Vamvakidis, Gilles Moec, write in Jan. 16
client note
* Program likely to include all investment grade govt
bonds, with monthly or quarterly pace for purchases;
mutualization likely, ECB would retain considerable
discretion on details of purchases
* Crucial issue is if ECB manages to create “open ended”
feel; communication will be key for market reaction;
MORE
* Crucial issue is if ECB manages to create “open ended”
feel; communication will be key for market reaction;
MORE</li></ul>

* Barclays
* Expect ECB to announce expansion of asset-purchase
program to include govt bonds this week: technicalities
will likely be announced in March, strategists including
Nikolaos Sgouropoulos say in client note dated Jan. 18
* Central bank may signal program will stay open until CPI
expectations are firmly re-anchored
* Any QE without shared risk may be counter-productive,
analysts including Giuseppe Maraffino write in separate
note; MORE
* Any QE without shared risk may be counter-productive,
analysts including Giuseppe Maraffino write in separate
note; MORE</li></ul>

* Deutsche Bank
* ECJ’s opinion on OMT last week makes it easier for ECB
to act sooner and reduces risk of too much compromise on
program’s design, economist Mark Wall write in client
note dated Jan. 16
* Even if central bank waits until March, Draghi has to
send a clear signal on Jan. 22 of imminent QE; if vote
on QE is in Jan., full details are only likely in March
* Expect a broad-based asset purchase program encompassing
investment grade corporate bonds as well as sovereign
bonds, Wall writes in client note dated Jan. 9
* No target size to be set for sovereign purchases;
expects formal announcement of public QE from ECB on
March 5
* No target size to be set for sovereign purchases;
expects formal announcement of public QE from ECB on
March 5</li></ul>

* Goldman Sachs
* Expect ECB to announce expansion of asset-purchase
program on Thursday, with focus on sovereign debt and
size of EU500b-EU1t, economist Dirk Schumacher writes in
Jan. 13 note
* Purchases to be mutualized and conducted according to
capital key; degree of risk-sharing remains contested
among GC members, so other modalities are possible; MORE
* Purchases to be mutualized and conducted according to
capital key; degree of risk-sharing remains contested
among GC members, so other modalities are possible; MORE</li></ul>

* JPMorgan
* ECB likely to announce EU500b sovereign-debt purchase
plan, spread over coming year and with clear signal that
it could be scaled up if needed, economist Greg Fuzesi
writes in Jan. 16 note
* Expect ECB to be pari passu to other bondholders and
share credit risk on investment-grade bonds across
national central banks; sub-IG risk to remain with
national central banks
* TLTROs to be made more attractive; ECB also likely to
start buying non-financial corporate bonds; MORE
* TLTROs to be made more attractive; ECB also likely to
start buying non-financial corporate bonds; MORE</li></ul>

* HSBC
* ECB is likely to announce a broadening of asset purchase
program to include corporate and government bonds,
economist Janet Henry says in Jan. 16 note
* ECB may not announce magnitude of purchases; may stick
with previous statement that it intends to expand
balance sheet back to early-2012 levels
* If size of eventual purchases is capped or degree of
risk-sharing by national central banks is very limited,
announcement could disappoint market expectations
* If size of eventual purchases is capped or degree of
risk-sharing by national central banks is very limited,
announcement could disappoint market expectations</li></ul>

* Credit Suisse
* Attach 70% probability to QE in form of sovereign bond
purchases this wk, economists including Christel Aranda-
Hassel says in client note dated Jan. 16
* Expect ECB’s QE announcement to be accompanied by broad
guidelines rather than all details; bond-buying should
start before mid-Feb.
* Base-case scenario, to which CS attaches odds of 50%:
ECB announces EU500b-EU750b of sovereign, investment-
grade bond purchases
* Expect ECB to unveil “hybrid” bond-buying program in
which some risks are taken by national central banks,
strategists incl. Helen Haworth, write in Jan. 15 note;
MORE
* Expect ECB to unveil “hybrid” bond-buying program in
which some risks are taken by national central banks,
strategists incl. Helen Haworth, write in Jan. 15 note;
MORE</li></ul>

* Citigroup
* Expect ECB to announce QE this week; decision will
probably be taken with comfortable majority, economist
Guillaume Menuet says in client note dated Jan. 15
* To maximize effectiveness, QE would need to be open-
ended, fully mutualized, encompass all sovereign debt
issuers irrespective of credit ratings and include
instruments such as supranational issuers and inflation-
linked bonds
* ECB will probably be conservative because of the likely
reluctance to pre-commit
* Suspect inflation generated by QE may be limited,
probably leading to another program like QE2 or QE3,
possibly by mid-2016
* Suspect inflation generated by QE may be limited,
probably leading to another program like QE2 or QE3,
possibly by mid-2016</li></ul>


* UBS
* ECB is likely to announce this week purchases of EU1t
including sovereign debt, possibly augmented by
corporate and supranational debt, economists including
Reinhard Cluse write in Jan. 19 note; MORE
* ECB will leave door open to do more should inflation
fail to move back toward target within acceptable period
of time
* Unlikely for program to include Greek debt just 3 days
before Greek election (on Jan. 25)
* EUR may fall toward 1.10 USD if ECB QE exceeds
expectations; MORE
* EUR may fall toward 1.10 USD if ECB QE exceeds
expectations; MORE</li></ul>

* BNP Paribas
* ECB likely to announce sovereign QE on Thursday,
economists inc. Ken Wattret write in Jan. 13 note
* Expect deposit rate to remain at -20bps
* Size of sovereign bond program will probably be ~EU600b
per annum, with assets of longer maturity than under OMT
and purchases unsterilized
* Look for conditions to be attached, ruling out
participation of Greece
* Look for conditions to be attached, ruling out
participation of Greece</li></ul>

* RBS
* ECB is likely to announce EU650b of govt bond purchases;
EU650b is a conservative assumption; size could easily
be EU1t for sovereigns, head of European rates strategy
Andrew Roberts says in client note dated Jan. 19; MORE
* Expect ECB to announce QE this week; program to include
corporate bonds and securities issued by EIB as well as
sovereign bonds, economist Richard Barwell says in Jan.
19 note
* Expects no change in ECB interest rates in Jan. meeting
* Expects no change in ECB interest rates in Jan. meeting</li></ul>

* Societe Generale
* Expects ECB to announce a new purchase program including
corporates bonds, EU agencies and government bonds this
week, economist Michel Martinez says in client note
dated Jan. 16
* Package will eventually include EU400b of private assets
and EU500b-EU600b of sovereign bonds
* A hybrid system could be contemplated, including part-
mutualization based on capital key but with most
purchases undertaken by NCBs at their own risk
* Legal and political hurdles to risk-sharing will remain
significant in coming months
* Legal and political hurdles to risk-sharing will remain
significant in coming months</li></ul>

* Nomura
* ECB will probably announce on Thursday a large-scale
asset purchase program, including govt bonds, economist
Nick Matthews writes in Jan. 19 note
* Expects ECB to broaden existing ABS and covered bond
asset purchases to include corporate bonds, supras and
agencies
* ECB will probably detail monthly flow of public and
private sector asset purchases of at least EU40b per
month, for as long as necessary, conditional upon
inflation outlook
* ECB will probably detail monthly flow of public and
private sector asset purchases of at least EU40b per
month, for as long as necessary, conditional upon
inflation outlook</li></ul>

* Credit Agricole
* Easiest way to surprise markets would be with a flexible
program of at least EU500b, with more to come if needed,
economist Frederik Ducrozet writes in client note dated
Jan. 19
* Expects ECB to commit to monthly pace of EU40b-EU50b of
sovereign-bond purchases over 12 to 18 months, or an
implied total amount of EU500b-EU700b
* Sees combination of capital keys and caps on individual
bond holdings, with an attempt to keep credit risk at
national level
* EU1t balance-sheet-expansion strategy could be boosted
later this year should CPI outlook fail to improve
* EU1t balance-sheet-expansion strategy could be boosted
later this year should CPI outlook fail to improve</li></ul>

* ABN Amro
* Draghi will probably announce that ECB will embark on
large-scale asset purchase program, mainly consisting of
sovereign bonds, head of macro research Nick Kounis
writes in Jan. 16 note
* Program could also include other securities such as non-
financial corporate bonds and agency debt
* Purchases likely to be allocated according to capital
key
* Purchases likely to be allocated according to capital
key</li></ul>

* Commerzbank
* ECB likely to announce broad-based sovereign QE on
Thursday, economist Michael Schubert writes in Jan. 16
note
* National central banks will likely have to buy up own
countries’ bonds at own risk; this should ensure that
new Greek govt would be cautious about advocating debt
forgiveness, and could also result in greater support
across Governing Council
* Purchases likely to be in line with capital key; ECB
likely to buy floaters and linkers to avoid market
distortions; purchases probably won’t be limited to
particular maturities
* Purchases likely to be in line with capital key; ECB
likely to buy floaters and linkers to avoid market
distortions; purchases probably won’t be limited to
particular maturities</li></ul>

* ING
* European Court of Justice aide’s opinion on legality of
OMT program removed last roadblock to QE, economists
inc. James Knightley write in Jan. 16 note
* Central bank probably won’t present all details of
likely program, postponing them to March meeting
* Central bank probably won’t present all details of
likely program, postponing them to March meeting</li></ul>

* UniCredit
* ECB probably has QE package in pipeline that includes at
least EU500b of govt bonds and up to EU250b of non-
financial corporate and agency/supranational debt,
economist Marco Valli writes in Jan. 15 note
* Timing a close call; plan could be ready on Thursday, as
suggested by recent comments from officials
* There will be probably be some limit to risk-sharing,
with national central banks retaining some or all risk
* There will be probably be some limit to risk-sharing,
with national central banks retaining some or all risk</li></ul>

* Market Securities
* ECB likely to announce corporate and sovereign bond
purchases on Thursday, economist Christophe Barraud
writes in Jan. 19 note
* Looks for hybrid approach involving risk-sharing across
euro-area, limited to a maximum of 50% of total program,
and separate purchases by national central banks
* ECB may not detail specific amount, could give a range;
likely to reiterate commitment to expand balance sheet
by almost EU1t
* ECB may not detail specific amount, could give a range;
likely to reiterate commitment to expand balance sheet
by almost EU1t</li></ul>


For Related News and Information:
First Word scrolling panel: FIRST<GO>
First Word newswire: NH BFW<GO>

To contact the reporters on this story:
Stefania Spezzati in Milan at +39-02-8064-4216 or
sspezzati@bloomberg.net;
Max Julius in London at +44-20-3525-8917 or
mjulius4@bloomberg.net
To contact the editors responsible for this story:
Jenny Paris at +44-20-3525-4044 or
jparis20@bloomberg.net
Patricia Lui