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This was never about ABS — the ECB is rudderless

By Tom Porter
21 Oct 2014

The European Central Bank put a lot of effort into telling everyone securitization’s direct link to the real economy was the reason it deserved to be the principal target of asset purchases. Now that illusion has been shattered by reports it is considering corporate bond purchases, the ECB should just get on with the broad-based cash injection it clearly intends.

Amid all the uncertainties Mario Draghi raised when he first revealed the ECB was working on ABS purchases back in June, securitization bankers were always certain of two things: it was never about small and medium-sized enterprises and they were never going to be able to buy enough.

To combat the latter problem, while avoiding the full-blown sovereign bond quantitative easing the markets are demanding, the ECB added covered bonds to the programme and now it is apparently considering throwing corporate bonds into the mix as well.

Investment grade corporates, which is no doubt where the ECB would end up aiming the bulk of its buying if the plan were to go ahead early next year, are a further step away from the small businesses the ECB says it is desperately trying to revive.

The ECB is clearly reluctant to use full-blown QE as anything but a last resort, and the Germany-shaped political barrier is another complication. But in its attempt to avoid getting the ‘big bazooka’ out, the ECB is starting to resemble a drunken sheriff firing randomly at the market with a pistol.

A Fitch investor poll on Tuesday showed 53% European fixed income investors considered deflation “high risk”, which was an all-time high. The euro zone is perilously close to falling back into recession. Its central bank needs rising prices and a fall in the euro.

In this context the addition of corporate bonds makes sense. RBS strategists say the euro-denominated investment grade market for non-financial corporate debt is around €963bn in size, rising to over €1.8bn including financials. So there is the size the ECB needs and the market is more liquid than either ABS or covered bonds.

A large, liquid market. Where is there another one of those?

The ECB is operating in a world where any utterance of the word “QE” by a Fed board member buoys equities and makes investors forget about the latest poor economic data from China, not to mention making the euro even more expensive relative to the dollar.

Eventually it is going to have to go big, which is why everyone who is long periphery sovereigns will have had a spring in their step on Tuesday.

Better yet, give it to the real economy directly. The ECB could take its €1tr and give €3,000 to each citizen of the Eurozone, with instructions to spend it by Christmas or lose it. It would then get directly to at least some of the businesses and people that need it, rather than flattering investors’ portfolios or sitting on bank balance sheets. Then the ECB's market potshots would at least hit some of the targets.

By Tom Porter
21 Oct 2014