Second JCER-OMFIF seminar

Transcription

1 Second JCER-OMFIF seminar State of play of ECB monetary policy The problems of shared sovereignty David Marsh, Managing Director, OMFIF Tokyo, 22 November 217

2 The ECB s QE next steps Buoyant euro area recovery but danger signals for 218 Momentum building behind further EMU integration including EMF support fund Question marks over German coalition-building Multiple problems over shared sovereignty in contrast to all other QE programmes Health of Italian banks heavily dependent on continued Banca d Italia bond purchases Problems looming over ECB scrutiny of southern banks NPLs and exposed Deutsche Bank Deflationary danger passed and yet ECB purchases will continue throughout 218 Draghi has learned lesson of premature ECB monetary tightening in 211 ECB politics dominated by potential quarrels over Draghi succession US QE could restart in 219-2, with ECB balance sheet normalisation not yet under way 2

3 Jan 27 Apr 27 Jul 27 Oct 27 Jan 28 Apr 28 Jul 28 Oct 28 Jan 29 Apr 29 Jul 29 Oct 29 Jan 21 Apr 21 Jul 21 Oct 21 Jan 211 Apr 211 Jul 211 Oct 211 Jan 212 Apr 212 Jul 212 Oct 212 Jan 213 Apr 213 Jul 213 Oct 213 Jan 214 Apr 214 Jul 214 Oct 214 Jan 215 Apr 215 Jul 215 Oct 215 Jan 216 Apr 216 Jul 216 Oct 216 Jan 217 Apr 217 Jul 217 Quantitative easing at leading central banks Central bank assets, Jan 27 = Draghi start date ECB first major central bank to cut interest rates below zero Source: National Central banks, OMFIF analysis BoE BoJ Fed ECB The industrialised world s four premier central banks have followed different approaches to QE since the outbreak of the financial crisis. The US, UK and Euro area are starting to end QE, while the Bank of Japan is continues. 3

4 Euro area returning to strength Developments of key indicators since start of QE Unemployment rate, y-o-y real GDP growth and headline inflation, %, and euro-dollar exchange rate 1.5 The goal of the quantitative easing programme is to raise inflation and return the euro area economy to growth. Compared with just before the start of covered bond purchases in the third quarter of 214, the latest figures for the euro area are encouraging. Unemployment has fallen by almost 2.5 percentage points, GDP is growing at its strongest pace since 27, the euro has weakened against the dollar (despite strengthening recently) and, crucially, inflation is closer to its 2% target However the pace of the recovery differs between countries, creating challenges for evaluating the relative costs and benefits of further QE. Although QE is credited with supporting the euro area towards recovery, other factors including low oil prices and a post-29 stimulus from China have also played a role. Unemployment rate GDP growth Dollar per euro Inflation rate Source: ECB, Eurostat, OMFIF analysis August 214 September 217 At the same time, pressures resulting from distorted risk premia, moral hazard and potential losses associated with QE purchases, mean there are calls from within the euro area to reduce and ultimately end asset purchases. An increase in support for anti-euro parties in Italy, France, Germany and the Netherlands adds to the ECB s challenges. 4

5 ECB long-term refinancing operations followed by asset purchases Eurosystem balance sheet, bn LTRO APP TLTRO Other assets 5 Reserves Source: ECB 5

6 First announcement Source: ECB, OMFIF analysis Asset purchases dominated by public sector bonds Programme start QE primer: components of the APP Total purchases since start Type of securities PSPP Jan 215 Mar tn (83%) Public sector bonds including agencies and supranational institutions Issue limit 33% (5% for supranationals) CBPP3 Sep 214 Oct bn (11%) Covered bonds 7% (3% for Greece and Cyprus) ABSPP Sep 214 Nov bn (1%) Asset-backed securities CSPP Mar 216 Jun bn (5%) Corporate sector bonds Total (expanded APP) 2.18tn 7% (3% for Greece and Cyprus) 7% Since March 215 the ECB has conducted its expanded asset purchase programme, under which national central banks and the ECB buy a range of eligible bonds from within the euro area. Total purchases at 12 October amount to 2.18tn (including 55bn of covered bonds and assetbacked securities purchased between October 214 and the start of the expanded APP). The vast majority of the securities purchased have been public sector bonds, including debt from governments, agencies and supranational institutions. The amount of each security that can be bought is subject to limits ranging from 33% to 7% of the total amount outstanding for each country. The 6bn monthly purchases are divided among euro area countries according to their capital key share (the amount of ECB capital provided by each country). 6

7 ECB balance sheet expansion driven by APP assets Components of ECB balance sheet, year end, bn Since 215, QE purchases have expanded the ECB s balance sheet by more than 2tn. Around half the ECB s assets are now made up of securities bought under the APP, mostly public sector bonds. Latest figures (Oct) put the total balance sheet at almost 4.4tn, up from less than 2.3tn in February Total APP values, year end, 215, 216 and 217 (Oct) CSPP 51bn ABSPP 23bn CSPP 122bn CBPP3 236bn ABSPP 25bn Claims on non-euro area residents denominated in euro General government debt denominated in euro Claims on euro area residents denominated in foreign currency Other claims on euro area credit institutions denominated in euro Other assets Claims on non-euro area residents denominated in foreign currency Gold and gold receivables ABSPP 15bn CBPP 145bn PSPP 495bn CSPP CBPP 27bn PSPP 1,272bn PSPP 1,798bn Source: ECB, OMFIF analysis 7

8 Despite higher growth and inflation, productivity and wages are low Labour productivity growth, YoY, % Draghi s dashboard Key indicators of the euro area economy Nominal wage growth, YoY, % Household consumption growth, YoY, % While inflation, GDP growth and unemployment are the main factors influencing QE, ECB decisions are affected by a range of other indicators. Productivity growth has slowed across the euro area, reflecting relatively weak investment. As more people have returned to work, the overall output per worker has fallen. This also reflects the consequences of skills deterioration, as the long-term unemployed either lose the skills they had or fail to acquire the ones required by new jobs becoming available. Nominal wage growth remains weak as low productivity combined with a large number of job seekers reduces remuneration. As euro area inflation figures inch upwards, real wages will face increased pressure. This has negative repercussions on household consumption, an important driver of the European economy. Although it has picked up this year, consumption growth remains muted. Source: ECB, Eurostat, OMFIF analysis 8

9 Country name and capital key share Total pspp purchases, m Capital key deviation led by Germany, France and Italy Distribution of PSPP purchases by jurisdiction Actual % of PSPP Cumulative deviation from capital key, m Cumulative deviation from adjusted capital key, m Austria (2.8%) 47, , ,228.5 Belgium (3.5%) 6, , ,66.9 The amount of each country s assets purchased under the APP is determined by the capital key, reflecting the size of GDP and population. In practice, many countries lack sufficiently large bond markets to fulfil their quota. Cyprus (.2%) ,34.7-3,49.3 Estonia (.3%) , ,549.9 Finland (1.8%) 26, , ,167. France (2.1%) 345, , ,634.4 Germany (25.6%) 425, ,66.1 6,214.5 Ireland (1.6%) 23, , ,366.8 Italy (17.5%) 3, , ,953.6 Latvia (.4%) 1, , ,47.9 Lithuania (.6%) 2, , ,119.6 Luxembourg (.3%) 2, , ,578.1 Malta (.1%) 1,15.1-2, Netherlands (5.7%) 95, ,3.4 Portugal (2.5%) 29, , ,68.5 Slovakia (1.1%) 1, , ,42.8 Slovenia (.5%) 6, ,58.6-1,855.8 Spain (12.6%) 212, , ,645. This has resulted in under-purchases in Portugal, Slovakia, Lithuania and others. Substitute purchases by these countries of bonds from supranational institutions have compensated for some of this divergence. However the overall amount of supranational purchases remains low, at just over 1% of total purchases. As a result, countries with larger bond markets, including France, Italy, Germany and Spain, have over-purchased bonds throughout the QE programme, allowing the ECB to reach its monthly target. In fact, all countries allocations are slightly larger than the capital key suggests, as Greek bonds are ineligible under the PSPP owing to their low credit rating. As a result, Greece s capital key share of 2.9% is redistributed among the other countries. The amount that each country s purchases deviate from their monthly quota depends on whether one uses the adjusted capital key (to take into account the redistribution of Greece s share) or the non-adjusted capital key (see table). Source: ECB, OMFIF analysis Note: Greece is not included due to the ineligibility of its bonds under the PSPP 9

10 QE start QE start Germany, Netherlands become under-purchasers Monthly capital key deviation by net over-purchasers a) Adjusted capital key, bn b) Non-adjusted capital key, bn According to the adjusted capital key figures, Germany, which had 1.4 been one of the largest over-purchasers of bonds since March 215, has started to under-purchase bonds as of April Its average monthly undershoot since April amounts to almost 3m. The Netherlands, another important over-purchaser, has also started to under-purchase bonds (see panel a) According to the non-adjusted capital key, which is the measure the Bundesbank prefers to use, German bond purchases have not turned negative (except for a small 38m deviation in August and 8m in September, mostly explained by low liquidity in bond markets over the summer). Austria Belgium Finland France Germany Italy Netherlands Spain Germany Netherlands According to this measure, the fall in German purchases since April brings the average figures for the past six months roughly in line with Germany s capital key allocation, and not below it (see panel b). Source: ECB, OMFIF analysis Whether German purchases are negative or merely in line with the minimum capital key, the fall since April has been sharp. The reduction in monthly purchases points to problems for the future of the ECB s QE programme. 1

11 Luxembourg Malta Germany Greece Cyprus Netherlands Estonia Lithuania Latvia Ireland Austria Slovakia Slovenia Portugal Italy Belgium France Spain Greece Italy Portugal Belgium Cyprus Spain France Austria Slovenia Ireland Germany Finland Netherlands Malta Slovakia Lithuania Latvia Luxembourg Estonia German bond scarcity driven by fiscal restraint 2 Fiscal balance 4 2 Debt to GDP, % In addition to the demand-side factors affecting the amount of eligible German bonds, there is an important role on the supply side Germany runs the largest government surplus in the euro area, at 23.7bn (.8% of GDP). The next largest surplus country is the Netherlands, with 2.9bn (.4% of GDP). Germany s gross government debt, at around 7% of GDP, is among the lowest in the euro area. Although it is substantial in absolute terms, at 2.11tn (putting it third behind Italy and France), its PSPP-eligible debt is just 1.54tn. Given Germany s large capital key share, relatively more of its debt is needed to execute the ECB s bond purchase programme. % of GDP (LHS) bn Source: Eurostat, OMFIF analysis While plans for German debt issuance in 218 will not be released until December, its overall figures are on a declining trend. Since the start of QE, Germany s gross government debt has fallen by.5% per quarter on average. Agency bond issuance has not compensated for this decline, suggesting that the available universe of PSPP bonds in Germany will shrink further throughout

12 QE contributing to capital flight Target-2 claims and liabilities, select countries, bn Since the start of QE in 215 net claims and liabilities on the Target-2 system have increased rapidly. Target-2 balances reflect cross-border payments and transfers within the euro area. The growth of German and Dutch claims, as well as Spanish and Italian liabilities, reflects, in part, the shift into core, northern country assets and away from periphery, southern countries. In effect, this is one of the consequences of QE, as it has allowed holders of Italian or Spanish bonds to sell them to the national central bank and use the proceeds to purchase assets in Germany or the Netherlands The longer QE continues, the larger these balances are likely to become. -6 A tightening of monetary conditions may in theory spur a shift back towards Italian, Spanish and other assets, as bond yields in those countries rise. Source: ECB, OMFIF analysis Germany Spain Italy Netherlands In practice, the financial stress resulting from higher yields and a greater cost of servicing debt in those countries could further push investors into core country assets. 12

13 Mar Germany buying shorter-dated maturities Weighted average maturity of PSPP bonds, euro area total against Germany, % Instead of purchasing more substitute bonds from supranational institutions, the ECB could adjust the rules of the PSPP to ease market strains. One option is simply to raise the limit on how much of each bond issue can be purchased, from the current 33% to around 5%. This has already happened for supranational bonds. Applying this rule to national public sector bonds would reduce the biggest limitation facing German and Dutch bonds. Although this would permit QE to go on for several more years before the limits are reached, that goes against the will of the Bundesbank and others who want to see a speedier end to bond purchases. Second, it would further compress German yields and widen the spread with other countries. This would have significant negative effects on the investments of German insurers and pension funds an important consideration in a country with the world s second-oldest population (after Japan) Germany Total Third, many of the bonds that would be purchased would fall below the ECB deposit rate of minus.4%. Since January 217, bonds below this have been eligible. That has allowed shorter-maturity bonds with negative yields to be purchased, mostly by Germany. This is reflected in the swift decline this year of the average maturity of the stock of German PSPP bonds (see chart). However, the guaranteed loss on these assets make it a highly controversial prospect. Fourth, the possibility that Germany may be liable for losses by other national central banks purchasing their own country s government bonds has put the QE programme in the focus of the German constitutional court. This creates additional uncertainty for expanding QE. Source: ECB, OMFIF analysis 13

14 Germany could soon reach 33% issue limit Estimates of issuer limit for German public sector bonds bought under PSPP, with post-217 QE adjustment scenarios 4% 38% 36% 34% 33% issuer limit The clearest explanation for the dramatic fall in the amount of German public sector bonds purchased is that, given Germany s large capital key share, so many bonds have been bought that the country could soon approach the 33% issue limit. If Germany had continued purchasing bonds at its pre-april rate this could have been breached in early 218 (see dotted line on chart). 32% 3% 28% 26% 24% 22% Level at Oct monetary policy meeting Start of post-217 adjustment scenarios The ECB has decided to extend asset purchases beyond December, st a reduced rate of 3bn per month from Jan-Sep 218. No firm date has been set for the programme to end. The plan for 18bn of additional public sector bonds after December % of which will be allocated to Germany is calibrated to prevent the issue limit being breached within the next nine months. This depends on the pace of bond purchases post-217 (see chart). 2% Jan 217 Apr 217 Jul 217 Oct 217 Jan 218 Apr 218 Jul 218 Oct 218 6bn/month (no adjustment) 1bn/month taper 5bn/month purchase 4bn/month purchase 3bn/month purchase 2bn/month purchase Germany continues overpurchasing Source: ECB, OMFIF analysis Should the 33% limit be reached, German purchases would drop dramatically, and other euro area countries would be unable to make up the difference, forcing the ECB s QE programme into a premature and hasty end. By reducing its purchases to the minimum monthly amount, the Bundesbank may be delaying the date of such a sudden end. 14

15 Ambiguous rules on re-investment present flexibility and uncertainty 25 Estimate of amounts to be re-invested as APP bonds mature, by country, bn One factor easing the ECB s attempt to extend QE is the large amount of German bonds maturing over the next few years. The ECB has committed to reinvesting all maturing debt back into euro area bond markets. 2 Over 1bn of German bonds will mature by 219, the largest amount of any country. That gives the central bank some room to maintain bond purchases, via reinvestment, for longer However there is significant ambiguity in the ECB s guidance on this. It is not clear whether funds must be reinvested back into the same type of security or can be transferred to other assets eligible under the QE programme from corporate bonds to government bonds for example. 5 Whether assets can be bought with different maturities to those maturing or potentially from other countries, if the ECB eventually abandons capital key requirement for reinvested assets is also unclear. Different interpretations of these rules are likely to have significantly different impacts on markets. Meanwhile, lack of certainty increases the risk of misinterpretation of signals coming from the ECB or coming from data on market transactions. Germany Spain France Italy Netherlands Others (incl. supranationals) Source: ECB, Bloomberg, OMFIF analysis 15

16 Draghi s problem no more the ECB succession OMFIF advisers expect Draghi s successor to be German In September OMFIF polled its advisers network on the future leadership of the ECB. Members of the network were asked: After Mario Draghi steps down as president of the ECB in November 219, who will replace him?. The choices were Jens Weidmann, president of the Deutsche Bundesbank, François Villeroy de Galhau, governor of the Banque de France, or someone else. Of those polled, 61% forecast that As Germany adjusts to the challenge of working closely with a reforming France under President Macron, it will need the reassurance of having, at the helm of the ECB, somebody who instinctively understands the importance of the ECB s mission to defend the long-term value of the euro Weidmann will take over from Draghi, while 3% believe that Villeroy de Galhau will be selected. Just 9% expect the role to go to another candidate. Source: OMFIF Advisers Network Monthly Poll It will be Villeroy de Galhau the Germans will take a spot at Brussels-EU institutions in exchange Klaas Knot, president of the Dutch central bank, is a possibility. He is as tough as Weidmann but not a German, and that might make him more acceptable for other countries Never underestimate French ingenuity in the business of horse trading Any candidate requires the endorsement of all European Union finance ministers. He or she then has a hearing at the European Parliament, which casts a nonbinding vote. The post is finally confirmed by euro area leaders, and is then held for eight years. The parliament has no power to block ECB appointments. 16