ECB preview: waiting is an option.
While the most important decisions have been made outside regular meetings recently, the pressure remains on the ECB to do more eventually. (1/n)
While the most important decisions have been made outside regular meetings recently, the pressure remains on the ECB to do more eventually. (1/n)
The ECB would have hoped to be safe for much longer after launching several bazookas since mid-March, but pending a more ambitious economic/fiscal response, the central bank remains the only credible bulwark against tighter/fragmented financial conditions. (2/n)
On balance, it might be too early for the ECB to take another bold step at the 30 April meeting, ahead of two important deadlines – the European Recovery Fund proposal (within two weeks), and the German constitutional court ruling on the APP (5 May). (3/n)
But, at the very least, the ECB should signal the possibility of an increase in the €750bn PEPP envelope, and there are several other things they can do, or hint at, this week. (4/n)
PEPP: we expect an increase to at least €1tn by June, but PEPP to remain temporary (possibly beyond 2020 but without reinvestments) and flexible (capital keys as guiding principle while large deviations continue). A formal drop of capital keys would be a game changer. (5/n)
PEPP again: other innovations are possible, including an expansion to lower-rated corporate debt or to financial Commercial Paper.
+ clarification on issuer limits?
+ publication of monthly breakdown? 🙏 (6/n)
+ clarification on issuer limits?
+ publication of monthly breakdown? 🙏 (6/n)
APP + Temporary Envelope: the case for an increase is also building as the outlook deteriorates and the €120bn envelope would be exhausted by June at the current pace, but a decision could wait until June. Problem: the ECB is getting closer to issuer limits under the APP. (7/n)
Collateral and asset purchases: the ECB could extend its decision to freeze the collateral pool until Sep-21 to asset purchases (no automaticity). If so, Italian debt would remain eligible to QE, be it above some non-IG rating threshold and with larger haircuts. (8/n)
Policy rates: there has been no hint at a possible rate cut... meaning that it would surprise the market if they did, while lowering Euribor fixings without addressing the underlying tensions. A rate cut would be a mistake imo, but hey, nothing can be ruled out. (9/n)
Tiering: we still expect the ECB to increase the tiering multiplier (from 6x required reserves to 8x). Net of tiering and TLTRO, the annual ‘cost’ of negative policy rates has fallen to about €2bn, but it will start to rise again along with excess liquidity. (10/n)
Tiering: an increase in the multiplier looks feasible by June without disruptions as the €2tn excess liquidity becomes more evenly spread (Italy is where liquidity in excess of tiered reserves is the lowest). The ECB could completely offset the impact of negative rates! (11/n)
(T)LTRO: benchmark lending conditions could be eased further to make sure all banks benefit; the minimum TLTRO interest rate could be cut from -0.75% to -1%; weekly bridge LTRO could be extended. All successful and not very controversial. (12/n)
What else? OMT. I still doubt it's part of the solution. OMT is *not* unlimited (constrained on maturities, possibly limits). No magic fix to debt sustainability. Not superior to PEPP. And what about legal risks without conditionality?Forget about it. /END
