Why Draghi's ABS "Stimulus" Plan Won't Help Europe's Economy

Simply put, the reason why Mario Draghi's impressively-pitched ABS 'stimulus' QE-lite plan won't help can be summed up in 2 words "unencumbered assets." There is simply a lack of the right quality collateral, that has not already been swapped with the ECB (or delevered off balance sheets), for this to make a difference. However, as Bloomberg reports, the plan will not even get that far.. because the market for these assets is incapable of supporting this size of buying. As one major ABS asset manager notes, it takes him about three months to buy 1 billion euros of these securities, "the number that's circulating the market is 500 billion euros, but where is he going to get it from?" Add to that the report from Die Welt that The ECB lacks sufficient expertise for ABS purchases, and as another major European ABS manager concludes, "I don't see either a capital relief for banks or the banks giving more credit to the real economy." Still, it's fun to believe Draghi's promises, right?

 

Draghi's biggest problem...

But as Bloomberg reports, there are other issues to deal with...

The European Central Bank president’s plans are being greeted with skepticism by investors who have seen the 1.2 trillion-euro market contract more than 40 percent since 2010 as regulators cracked down on the debt blamed for deepening the financial crisis. The securities are also typically bought by pension funds, insurers and banks who hold them until maturity.

 

As head of ABS at Aegon Asset Management, which oversees 240 billion euros ($311 billion), Meijer says it takes him about three months to buy 1 billion euros of securities.

 

“The number that’s circulating the market is 500 billion euros, but where is he going to get it from?” said Meijer, who is based in The Hague. “Existing bonds are unavailable so he might have to ask banks to create new ones.”

 

...

 

“The news is clearly positive but the ECB will have to be careful not to alienate the existing investor base in ABS,” said Patrick Janssen, a fund manager at London-based M&G Investments, which oversees 21 billion euros of ABS. “There is a risk of us being crowded out.”

Policy makers are running out of options to stimulate Europe’s economy.

European ABS sales fell to about 74 billion euros last year from 325 billion euros in 2007, an almost 80 percent decline, according to JPMorgan Chase & Co. Citigroup Inc. estimated earlier this year that there are only about 13 billion euros of public bonds outstanding that are backed by loans to small-to-medium sized companies, the part of the market that the ECB has sought to revive.

And as Die Welt reports,

  • *ECB LACKS CAPACITY TO CONDUCT ABS PURCHASES: DIE WELT
  • *ECB DOESN'T HAVE SUFFICIENT EXPERIENCE FOR ABS PURCHASES: WELT
  • *ECB PLANS TO HIRE BANKS, OTHERS TO IMPLEMENT ABS PROGRAM: WELT
  • *ECB MAY USE EXTERNAL COMPANY FOR SOME ABS PURCHASES: DIE WELT

Great - so ECB can't do it - so put the biggest asset-holders in charge of buying their own stuff with European taxpayer money?

*  *  *

We leave it to Bloomberg to conclude...

The ECB initially plans to target the most senior and least-risky segment of the secured bond market. The central bank would only consider buying lower portions, such as the so-called mezzanine part, if governments provide a guarantee, Draghi said.

 

The ECB needs to buy the junior portions of the securities to have the desired effect, said Robert Wakiyama, who manages the $1.4 billion Credit Suisse Lux Global Securitized Bond Fund (CSSIFAB) from Zurich. That’s because banks and insurance companies that buy the bonds have to hold more capital to insure against losses on the junior portions of the securities.

 

“Buying senior ABS bonds is not the solution in our view as it doesn’t take the risk from the banks’ balance sheet,” Wakiyama said. “With the current regulation, banks have to retain the most junior part. As long as the ECB isn’t participating in those bonds, I don’t see either a capital relief for banks or the banks giving more credit to the real economy.”

*  *  *

So apart from a lack of assets, lack of liquidity, concerns over crowding out, and knowing that the transmission channels to the econonmy will remain clogged since ECB is only buying the seniors... this is a great idea, right?