ECB corporate bond buying has become gratuitous
The European Central Bank’s bond buying is doing bizarre things to corporate spreads that saw an airline reprice its curve this week in the midst of a once-in-a-lifetime crisis for the aviation industry. With a market this broken, it’s time for the central bank to see where its money can be put to better use.
ECB largesse has rocketed to unprecedented levels with the Pandemic Emergency Purchase Programme.
Without a doubt, the liquidity provided during the first months of the crisis stabilised the financial system and stopped entire sectors from collapsing into insolvency. But the dust is settling, and the central bank’s spending is not doing a great deal to help the economies it is seeking to protect.
Take German car company Daimler. It printed its debut green deal recently 25bp inside its curve and repriced its conventional curve by 10bp as a result. There are other factors at play here, such as a higher than usual demand for green debt, but these are trivial compared to the mighty bid from the ECB.
Other than some congratulatory backslapping among those involved, does Daimler being able to print so far inside fair value really make much of a difference to the company, compared to pricing with a 10bp concession? Of course not. The excess liquidity is gratuitous at this point.
Instead it is encouraging indebtedness at a time when borrowers have bleak prospects of paying it back and it is crushing investor returns to boot, storing up a crisis that will hit, say, pensions further down the line.
Instead, the ECB needs to refocus a sizeable chunk of its spending on places that are still staring into the abyss. SMEs are shutting at alarming rates across the continent and, despite the best hopes of trickle-down economic theory, they likely won’t see a splash of the endless liquidity that Europe’s safest, largest companies bathe in.