We were surprised to read one JP Morgan analyst comment this morning:
“The most effective strategy would be 17 different plans, one for each state member, so the impact would be optimized according to each issuing country’s bonds characteristics (size, duration, liquitidy,” analysts at JP Morgan point out, although they acknowledge that would be too complicated and lead to purchases of each country’s debt according to their weight at the ECB.
If there is no common direction, then what is the EU for?
The logistics of a quantitative easing programme might be more complicated in the EU than in the US since the ECB has not issued Eurobonds yet, mostly due to the former opposition of Bundesbank president and ECB’s governing council member Jens Weidmann. But even Mr Weidmann has softned his position and doesn’t rule out QE anymore.
The mere expectations of a QE have helped to control some peripheral countries’ sovereign bond yields (take Spain).
QE would mean a virtuous circle: countries getting cheaper funding in the markets; the ECB taking a commitment to solidarity between its members, peripherals’ premium risks going down (although EZ risk premium Vs other countries could go up, JP Morgan team warns.)
The banking sector would be also benefitted since they hold sovereign debt, and QE would increase their ability to attract funds. And although QE is not a substitute for the process of cleaning their balance sheet, it can at least help. In fact, the combination of the ABS purchase, the TLTROs and the QE, simultaneously can expand the impact of the policies if implemented individually.
But a too quick implementation would be a bad idea too. Analysts at Santander commented on Tuesday:
“It wouldn’t be anysurprise that the ECB chose to delay the use of the probably most effective bullet (QE of corporate bonds, and govies) untilthe Fed begins really to shift its monetary policy.”