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FIGCovered Bonds

Central Bank Liquidity

EUROWEEK: Does it concern you that we might soon be seeing a reining back of central bank liquidity?

Juhasz, World Bank: It is quite unusual in a normal environment to see all the asset classes moving in the same direction at the same time. So it would be healthier in the long run to see central banks decrease quantitative easing. When this occurs it should help to improve supply and ultimately it should improve yields. Though QE withdrawal is negative from the market’s perspective, in the long run I think this is the only way to go.

Goldfischer, CA-CIB: If for any reason the central banks start to ease off the liquidity pump too fast, and they make a mistake on reading the economy then we might have a problem. Basically, the global economy used to be in the emergency room and to some extent still is because it still depends on the excess liquidity of central banks, particularly in Europe.

Denger, MEAG: Recent changes in the ECB’s repo haircuts could be a sign that central banks are starting to look more closely at the effect of their liquidity provision. I believe that central banks will act very consciously to decrease liquidity but only if the markets can withstand it. But if markets react badly to the withdrawal of liquidity I believe that central banks will be ready to renew the existing facilities or even increase them.

Burmeister, DeAWM: Withdrawal of central bank liquidity will be done step-by-step rather than in one go. But it’s something that the market will have to deal with. The US could start to withdraw liquidity by the end of this year and market participants will just have to deal with it. It is going to happen anyway because obviously this is not something that can go on for years and years.

Cortazar, BBVA AM: But I still think the ECB will remain on standby to provide liquidity if it is needed and for as long as necessary. The economic cycle in Spain, Italy and Europe in general is very different from the US which is now starting to return to a growth path.

Lavastre, CDC: We expect the market to digest the more hawkish FOMC statements first and watch to see what the impact will be on European periphery yields before new issuance is seen.

Hoarau, CA-CIB: At some point the ECB will start to restrict liquidity and, after a powerful rally, market participants are likely to take profits and favour cash or very short term investments with a potentially devastating impact on the capital markets. But I don’t see that happening soon in Europe because the economic fundamentals don’t justify it and the situation isn’t likely to change in the near future.

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