Will we see a second round of QE in Europe soon?

In their Monday commentary, Barclays gives the reasons why they expect a QE2:

1- Because it will be very difficult to reach a $1Tr expansion of the balance sheet of the ECB putting together the TLTRO, ABS and mortgages purchases. Although the ECB has not said how much would be the QE, if said that its target was to bring the central bank’s balance sheet to 2012 levels. That means approximately one trillion in total for all the measures announced.

Barclays believes that the TLTRO will be of 420 billion between 2014, 2015 and 2016 auctions, which leaves us between 500 and 600 billion left for QE. The volume of ABS and RMBS is of 770 billion but only 230 billion would meet the requirements of the ECB purchases (transparent, simple and so on).

In the case of covered bonds, issuances are of 740 billion. However, when the ECB conducted its second program of repurchase of $40 billion, he could not finish it. Barclays says it bought 60 billion in the first program and the second only 16.4. Multiples of 100 purchases, which is what the ECB wants this time, is a difficult task.

2-If the 1tr expansion is achieved, it may not be enough. In order to bring inflation up from 0.2pc to 0.8pc. a trillion is needed. That means 1 tr will not be enough to bring inflation back to 2pc.

The main benefitted from this scenario are peripheral countries. Only from a theoretical point of view, and just looking at fundamentals, Spain and Italy vs Germany should be of 180-190 bp. However, since the ECB eliminates the possibility of non-compliance, if remove leverage (debt/GDP), then the differential could be between 70 and 80 pb… we could still see a further narrowing.

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