Europe's QE Programme Could Be Bigger Than People Are Expecting
The scheme involves buying government (and maybe corporate) debt, with the aim of shifting markets towards other investments and generating some economic activity.
Investors are currently expecting ECB QE to be between €500 billion and €600 billion in size. That implies a fairly small scheme: The Bank of England racked up £375 billion (€488.87 billion) in asset purchases for an economy less than a third of the size.
But could the scheme be bigger?
Deutsche Bank think that the ECB will purchase no more than 25% of outstanding government debt, given the European Court of Justice's recent decision that the central bank's operations should not do too much to distort debt markets.
But even if the ECB they stopped at a 20% market share, it's not too difficult to raise the purchases towards €800 billion, so long as Frankfurt chooses to buy bonds with a longer than 10-year maturity. Deutsche Bank thinks the ECB will. Here's how much it can buy at different maturities, with different market shares:
Deutsche Bank
They're not alone: Economists at Credit Agricole say that they expect "that the ECB will have to extend its purchases to maturities of at least 10 years, if not more." On Deutsche's grid, even only going up to 10 year maturities suggests the programme could be worth nearly €700 billion.
Credit Agricole's first prediction was for a €500 billion QE programme, but that "recent developments and leaks by the press would suggest upside risks to this baseline." Here's what they're thinking now:
There are several ways for the ECB to surprise with the size of the programme, playing around with the total amount, the pace of monthly purchases or the time-frame over which QE will be implemented. An acceptable compromise could see the ECB commit to a monthly pace of purchases of EUR40-50bn of sovereign bond purchases over 12 to 18 months, implying a total amount of EUR500 -700bn.
They're joined by Oxford Economics, who say they're expecting even more:
Our view is that a larger programme may be announced, perhaps involving a commitment to meet the existing balance sheet target by the end of the year. This would involve purchases of about €800bn.
Under these forecasts, the QE programme would probably be enough to meet the ECB's balance sheet goal, returning its holdings to their mid-2012 size by mid-2016. Here's how that would look:
Oxford Economics
This all comes after ECB board member Benoit Coeure's comments at the end of last week. In an interview with the Irish Times, Coeure said that "for it to be effective, it would have to be big." He went on:
So we have to make the case in a convincing way that we have the resolve and the instrument to move the European economy out of the low growth, low inflation situation before it becomes a trap... And then all institutions have to contribute according to their mandate. The ECB has a mandate which has to do with inflation. We certainly have to act and show in a convincing way that we have instruments to act to deliver on our mandate.
It's possible that Coeure was just hypothesising, but it seems like an incredibly counterproductive thing to have done, if he's aware that the ECB are currently assembling a QE package that will be seen as disappointingly small on Thursday.