Vee are Not Embarking on QE
The head of the ECB Jean-Claude Trichet was most insistent during his press conference after the latest ECB meeting that their proposed purchases of €60 bln of “covered bonds” (mostly mortgage-backed securities issued mainly by German banks) did not mean that the ECB was commencing quantitative easing. His exact words during the Q&A session of the press conference were “we are not at all embarking on Quantitative Easing”.
Instead the €60 bln covered bond purchase plan was presented as providing “enhanced credit support” to the covered bond market which will help to improve the spreads, depth & liquidity of this particular market, seen by the ECB to be in particular trouble at the moment.
The Bundesbank has clearly dug its heels in over the ECB going down the road of QE and has compromised by agreeing to throw €60 bln instead at the covered bond market. Good to see the old City adage “If there is a problem then throw money at it until it goes away” has been taken on board by the burghers of Frankfurt.
Meanwhile the Bank of England has taken that particular City adage to heart by expanding its QE program from £75 bln to £125 bln. And if that does not do the trick then expect the BoE to throw even more money at the problem…there is no shortage of money to spend when the BoE can just print it (even if they describe this printing as “electronically crediting the accounts of those instituitions” which sell securities to the Asset Purchase Facility). The BoE is aiming to ease the flow of credit throughout the economy by purchasing gilts (mostly). It hopes the selling institutions will re-invest the proceeds elsewhere, thereby boosting asset prices & tightening credit spreads. It also hopes that some of this money will leak out into the wider economy and end up as spending on goods & services. By restricting their buying to gilts, the BoE will be unlikely to lose money as they are financing their purchases at near-zero rates of interest and will likely hold the gilts to maturity. By spending a big percentage of the Government’s borrowing requirement, the BoE is also hoping its purchases will help to avoid private borrowers being “crowded out” by the deluge of gilts being issued. Expect the BoE to spend much, much more than £125 bln before its Quantitative Easing program comes to an end. They truly are going to throw a great deal of money at this problem until it goes away.
Tags: Asset Purchase Facility, bank of england, boe, bundesbank, covered bonds, ECB, enhanced credit support, german banks, Jean-Claude Trichet, mortgage backed securities, QE, quantitative easing