FX MONETARY POLICies
WILL THE ECB PRINT ? The ‘muddle through’ approach
Quite a few analysts believe that - since the latest EU summit of December 9th has not been a game changer - market pressure may build ahead of a challenging start of 2012, as far as the redemption schedule for Euro sovereigns
is concerned. Without
prior commitments from the ECB, obviously unlikely at this point, markets may be weak as the heavy 3-month supply period approaches (specifically February, March and April 2012). At this point, the ECB may be forced into action, possibly very reluctantly. Assuming they do act, this should help stabilize spreads over the course of the redemption wave.
In fact aſter the Securities
Markets Programme (SMP) restarted in earnest in August, intervening in the Italian and Spanish secondary markets, the average weekly buying amount has been around 8 billion euro.
100 150 200
50
General government debt; Maastricht definition, in Sources: ECB; Bloomberg; Datastream.
Securities Markets Programme 0
Such an amount has even been slowing down significantly in the last 36 FX TRADER MAGAZINE January - March 2012 Jan 11 Apr 11 Jul 11 Oct 11
Outstanding (lhs) Weekly
purchases (rhs)
10 15 20
0 5
couple of weeks, maybe leaving space for a renewed effort in future weeks. Rumor is that there is an unofficial upper limit of 20 billion of weekly purchases. Redemption and coupon schedule
during the mentioned
refinancing hump (Feb, Mar, Apr) would suggest auctions for 106 billion euro for Italy and Spain (we included only bond, not bills whose auctions are much easier to cover even in a severely stressed market; also, for sake of simplicity, we are not considering new deficits but just rolling of existing debt).
10 20 30 40 50 60
0 2011 2012 2013 Govt Bonds Senior Covered Gov GTD Sub
conditional on aggressive action from politicians. It is unlikely that they will announce an aggressive long- term program in advance, preferring instead to increase their purchases in a ‘just-in-time’ manner to ensure pressure on politicians is maintained. All this could be consistent with a ‘muddle-through’ scenario where the crisis would drag along without either a sustainable solution or a final collapse in 2012. Barry Eichengreen, Professor of Economics and Political Science at Berkeley, is in this camp. “Many people think that 2012 will
10 15 20 25 30 35
0 5
2011 2012 2013 Source: Deutsche Bank, Bloomberg Finance LLP, Dealogic DCM Analytics
Government and Bank Bond Redemption Schedule of Italy (left) and Spain (right) from 2011 to 2013
Tat is about 8 billion per week. Adding in France and Belgium the amount would reach 131 billion (10 billion weekly). It would seem then that even keeping the SMP at the levels seen in the last few months would be enough to significantly help during the worst period of bond auctions. Tis could put a cap on yields and be enough to sail through the crowded redemption schedule. Still, without an
unlimited commitment (both
for amounts and length of time), the program is unlikely to trigger a dramatic narrowing of spreads. Given ECB fundamental opposition to such a strategy on a permanent basis, any increase in purchases will
likely be
be the make-or-break year for Europe – either a quantum leap in European integration, with the creation of a fiscal union and the issuance of Eurobonds, or the eurozone’s disintegration, igniting the mother of all financial crisis. In fact, neither scenario is plausible. Te collapse of the eurozone would, of course, be an economic and financial calamity. But that is precisely why the European Central Bank will overcome its reluctance and intervene in the Italian and Spanish bond markets, and why the Italian and Spanish governments will, in the end, use that breathing space to complete the reforms that the ECB requires as a quid pro quo”.
Govt Bonds Senior Covered Gov GTD Sub
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