Here's The Hidden Footnote That Shows Germany Caved In Its Opposition To Europe's €1 Trillion Rescue Plan
Hidden away in an Annex to the press release sent after Mario Draghi's press conference today, in which the ECB president was very light on the details of the new asset purchase program, is a key passage that will give people hope that his latest plan - which hopes to get money moving to Europe's struggling small companies - might actually have some impact.
Here is the innocuous looking bullet-point that might just make all the difference:
That sounds like vague banker-speak gobbledygook, but it's crucial: "Retained securities" are the assets held by banks in exchange for the ECB's cheap loans. Without those assets the total value of remaining eurozone small and medium-sized enterprises' asset-backed securities would be too small for the ECB to make a meaningful difference to the region's economic prospects.Here is a chart from Gareth Davies, managing director of international ABS and covered bond research, showing that without those "retained securities" the other available assets are just too small to make a meaningful difference to credit-starved companies.
I still think supply constraints exist in terms of the current outstanding stock (secondary) and flow (primary market) sizes. The way the ECB can however get access to size in the ABS space is through the purchase of previously structured and retained deals currently used as collateral at the ECB's short-term MROs (along with covered bond purchases).
There is currently around €726 billion of retained ABS , of which €699 billion is consumer ABS, RMBS and SME ABS. Frederik Ducrozet, senior economist at Crédit Agricole, says in a note that of this some €300 billion is eurozone collateral that would fall under the ECB's scope - a substantially larger market than would have been available if retained securities had not been included.
This will raise hopes that Draghi's plan might actually work.
Even more interestingly, Draghi suggested that the ECB Governing Council were unanimous in their support for using further extraordinary measures if the situation were to deteriorate further. This, coupled with the inclusion of retained securities in the asset purchase program, strongly suggests that he has been successful in extracting concessions from those who were resisting further central bank action - with Germany's Bundesbank chief among them.
Earlier this week Hans-Werner Sinn, German economist and president of the influential Ifo Institute for Economic Research, argued in the Financial Times argued that:
[The ABS program] is nothing less than a fiscal bailout - something the ECB has no right to undertake, as the German constitutional court implied when it declared OMT unlawful.
Although we don't yet have anything close to the full details of the ECB's plan, what we know strongly suggests that voices like Sinn's have been effectively silenced - at least for the moment.