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Mario Draghi should do his successor a favor by doing the heavy lifting on bond purchases, said Jefferies' Marchel Alexandrovich.
Less than two months before Christine Lagarde, the outgoing chief of the International Monetary Fund, is set to take up her new role in Frankfurt, analysts predict the European Central Bank will cut interest rates and may announce new bond purchases. Alexandrovich says policy makers' resolve to fight a worsening economic outlook will hardly be credible if they don't also tweak rules surrounding how much of a nation's debt can be bought.
“If QE is restarted -- which we expect -- we think it is important that the ECB also lifts the current 33% issuer limit in order to send the signal that additional purchases could carry on beyond the initial 6-9 months horizon,” he said in a note. “By not addressing the issuer limit now, it would essentially unnecessarily delay the discussion into next year and raise some doubt as to whether it could be increased at all.”
Governing Council members are divided over the need for asset purchases, with officials from Germany, the Netherlands, and Estonia among those arguing the measure would be disproportionate to economic conditions. Draghi said in July that the outlook is getting “worse and worse” and pledged to review a range of options.
Alexandrovich outlines in his note how much more of the region's debt could be bought if caps were lifted. At 50%, the Eurosystem's sovereign-bond holdings could reach a size of almost 3.4 trillion euros ($3.8 trillion), up from the current 2.2 trillion euros.
“Raising the limit to 40% would eliminate any doubt that QE (depending on the run-rate of course) could proceed for perhaps another 18 months,” he said. “This would not only send a strong message that the ECB has ‘not run out of ammunition' -- something which is heard far too often -- but also make Lagarde's task considerably easier in the future.”
To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow
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