Tuesday, 17 January 2017 13:27

As I Promised, EU Is Colliding Into Practical Confines of NIRP, Bank Hemorrhaging Up Next Featured

Nearly a year ago, I warned subscribers of consequences stemming from the ECB's negative interest rate program. Here's an exceprt from our resarch report titled  pdf European Banking Macro Issues for March 2016 (843 KB) .


In its March 2016 report The Bank for International Settlements warns of “great uncertainty” if rates stay negative for a prolonged period.  The report also states the likelihood of a currency war of competitive devaluations if more central banks use negative rates to pace up their economy.

Europes central bank launched a large scale program for asset buying referred as Expanded Asset Purchase Programme (APP) in March 2015 six years after the U.S. embarked on quantitative easing. The APP included the purchase programme for public sector securities to the existing private sector asset purchase program. 

The EAPP consists of

  • third covered bond purchase programme (CBPP3)
  • asset-backed securities purchase programme (ABSPP)
  • public sector purchase programme (PSPP)

ECB started buying Covered bonds and asset-backed securities through two separate programs namely ABSPP and CBPP3 programmes which were started in October 2014 and November 2014, respectively, amid declining inflation and growth.  However, growth had not rebounded with inflation drifting downwards through the end of 2014 and into early 2015. This prompted the ECB to launch a major asset purchase program referred as public sector purchase programme (PSPP) through which the Central Bank would buy euro-denominated, investment-grade securities issued by Euro area governments and European institutions. ECB aimed to purchase €60 billion of assets through these three programs combined together.

In March 2016, ECB announced the addition of corporate sector purchase programme (CSPP) to APP in order to purchase euro-denominated bonds issued by non-bank corporations established in the euro area.

EU bind buying plans

Debt securites under EU PSPP

While persistent deflation and low growth prompted the ECB to expand its asset purchase program from 60 billion to 80 billion on a monthly basis; the addition of corporate bonds in its purchase portfolio comes at a time when buying options for Central Bank are steadily shrinking.  

According to an analysis by Capital Economics, countries such as France and Italy have enough bonds on the market that the ECB could keep buying at its current rate for two to three years before it reaches to 33% limit set by ECB. In comparison, the available German bond pool will be exhausted in 18 months.

With a higher asset purchase target and no relaxation of restrictions on bond purchases such as limits on individual bond issues and bond issuers, the ECB was left with the option of expanding its buying portfolio by including corporate bonds.

mnths left under EU PSPP1


Now, the question du jour is.... Was I right in my analysis and forcast? Well, let's ask Bloomberg - Portugal Bonds Falter as ECB Running Out of Eligible Debt to Buy:

  • Continued deviation from ECB bond-buying rules looks likely
  • Bond yields have climbed as market wakes up to lower demand

The European Central Bank is running out of Portuguese bonds to buy.

The central bank’s holdings of Portugal’s debt are already pushing the limit set by its own guidelines, leaving it likely to buy less this year to avoid breaking those rules. That prospect has led to a selloff in Portuguese government bonds, with 10-year yields having risen almost 40 basis points since the ECB’s December meeting to hit an 11-month high last week.

The ECB will have to scale back Portuguese purchases by around a half, according to Commerzbank AG, while ABN AMRO Group NV sees it stopping or suspending them by June. To make up the shortfall, the ECB may continue to buy more bonds from other countries with a greater pool of eligible securities, such as Germany and France.

Now, of course, France and German bonds will run into the exact same problem shortly, all exacerbated by...


Remember my warnings given at the Baccarat Hotel in NYC?

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