Mario Draghi’s “big bazooka” could prove to be little more than a peashooter unless institutions such as pension funds and insurance companies can be persuaded to sell sovereign debt.
The European Central Bank president last week unveiled a much-heralded plan to buy €60bn a month of eurozone sovereign debt and other assets until September 2016.
John Greenwood, chief economist at Invesco, the fund manager, said this would raise the rate of eurozone “broad” money supply growth to 9.6 per cent a year — a similar level to that achieved by quantitative easing in the US — but only if sovereign bonds were bought from non-banks.
“Expansion of the ECB’s balance sheet is not an end in itself. What is needed is an increase in the balance sheet of the commercial banks. That is a crucial part of any QE programme,” said Mr Greenwood. He feared that if banks sell bonds to the ECB they will simply lodge the proceeds with their national central bank, an asset swap that would negate the effect of the ECB’s printing press.
Pension funds and insurers may be unwilling to sell “risk-free” government debt and buy higher-risk assets such as equities and corporate debt. A swath of regulations, such as Solvency II and FRS17, has pushed them in the opposite direction.
“The regulatory environment in Europe is pretty unfriendly to the second-round effects of this QE programme,” Mr Greenwood said.
While banks could sell bonds and use the proceeds to expand their lending operations, Yoram Lustig, head of UK multi-asset investments at Axa Investment Managers, pointed out that the banks took up just €130bn of the €317bn of cheap funding they were offered by the ECB late last year, suggesting there is little appetite to expand their balance sheets.
However, Andrew Balls, chief investment officer for global fixed income at Pimco, the world’s largest bond manager, said “if there are banks that are sitting on eurozone sovereign debt, we would hope that we get a rotation towards some greater lending”.
Mr Balls also believed that non-eurozone entities might be tempted to sell eurozone bonds as QE pushes yields lower, a process that would have the added advantage of weakening the euro. Mr Greenwood also saw some scope for fund managers to sell bonds.
The ECB’s move was broadly welcomed by fund managers. Threadneedle said it had raised its weighting to European equities in its multi-asset portfolios.
Tom Becket, chief investment officer at PSigma Investment Management, said Italian banks, some of which are trading at half their book value, could be a “great trading buy” if the ECB manages to stem the worst fears over Europe.
With net eurozone sovereign bond issuance running at €22bn a month, the QE programme “is large relative to supply”, added Mr Balls, suggesting it could have a significant impact on yields.
“For now we are happy with our positions, but we keep a very close eye on price,” he said.