ECB: A Closed “Open-ended” Program

Published on September 12, 2019

Despite a high profile resistance campaign led at the last-minute by some of the European Central Bank’s hawks against a new ECB Asset Purchase Program, outgoing ECB President Mario Draghi managed, as we suspected, to jam through a full package of measures at the Governing Council meeting today that did include new bond purchases, along with a widely expected, even if modest, 10 basis points cut to the central bank’s benchmark negative deposit rate (see SGH 9/5/2019, “ECB: Pushing for a Full Package”).

Draghi furthermore chose to present the 20 billion Euro per month bond purchase program — pretty much at the lowest end of market expectations – as open-ended, and linked the duration of the program to a “robust” improvement in the Eurozone inflation outlook that would precede the start to the normalization of interest rates as well.

Not quite…

** Beyond the resistance from ECB hawks, a major reason for the limited scope of monthly purchases in the new program is that the universe of bonds eligible for purchase is for all practical purposes capped by the ECB’s self-imposed 33% ownership limit on sovereign bond purchases, and even if the program is presented as an “open-ended” one, that limit is, as things stand, sacrosanct.

** Perhaps even more to the point, while many analysts and markets still hold out hope that this 33% limit can or will be revised upwards when reached, we understand that IMF Managing Director Christine Lagarde will definitively refrain from taking this on in her first acts as ECB President after she takes office on November 1, in the process triggering yet another challenge in the German and European courts or parliaments.

** Those limits translate, according to private sector calculations, into a six to twelve-month window for the new program for all effective purposes, despite its presentation formally as an “open-ended” program, at which point the ECB will either have to significantly expand the scope of assets in its purchase program, increase its 33% limits on sovereign bond holdings, or both – all enormously controversial measures.

** Indeed, Draghi’s efforts to deliver a full easing package were intended in part to clear the slate for his successor of any need to rush in to firefight another crisis, or to make controversial legacy decisions right off the bat that should have been taken by Draghi himself — and that includes a political dog-fight over the asset purchase program.

As we pointed out and was confirmed in the ECB press conference today, Lagarde’s first major project out of the gate will be a much higher level “strategic review.” That will include an assessment of the ECB’s inflation target (attempting to move it ostensibly to a more symmetric goal around, rather than just below, 2%), its more or less widely ignored monetary aggregates “second” pillar, and other such matters.

Those first priorities, presumably, will also include the thankless, and pretty much futile, task of browbeating Berlin into opening its purse strings to more fiscal stimulus.

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