What if before the sovereign QE, the ECB launched a corporate bond purchase plan?

But, what if before the sovereign QE, the ECB launched a purchase plan for equities? According to Carlos Egea, market watcher at Morgan Stanley, there is a 30% probability that this may happen. Furthermore, he explains the impact of such plan:

1. It would have an impact on the households’ wealth. Even though the investment in equities of the European households is below the one in the US, it would help to improve the consumers’ confidence.

2. It would boost the financial stability.

3. It would allow companies to strengthen their balances by reducing the equities’ risk premiums, disincentive the issuance of new debt, and encouraging companies to stop the issuance of debt so as to repurchase shares and increase capital.

4. On the long term it would reduce the “slack” (surplus of labour supply) and increase the investment. It would also have a positive impact on inflation.

5. The HFs would enter Europe so as to make the most of the cash inflow from the ECB.

6. Markets allow the ECB the capacity to expand its balance in a significant way: a) it could buy up to $2.6 billion/day if it purchased with 10% of the daily indexes volume; b) it could buy $3.5 billion/day if it purchased with 10% of the individual shares.

7. According to the ECB’s statutes (art. 18.1 and 18.2), it is authorized to operate within the financial markets buying and selling instruments priced in euros and other currencies, as well as precious metals.

8. According to the ECB’s guidelines regarding tools of the monetary policy, they can purchase debt instruments. The ECB’s Government Council adapts and modifies these guidelines according to the Treaty and the ESCB/ECB Statute.

The potential problems are two:

1) Difficult exit. Equities don’t expire and the ECB wouldn’t be able to have those shares ad infinitum, even though an exit from the programs of bond purchases is not easy either.

2) Potential additional risk in balance. Equities have a greater risk than the ABS mezzanine sections –which the ECB doesn’t want to buy because of the risk.

3) Good corporative government. What would it do with the voting rights? Would it externalize the management? Would it purchase banks’ shares?

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About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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