ECB May Have Only €220 Billion In QE Left If The Hawks Get Their Way

After seemingly sending out trial balloons (via Bloomberg and Reuters simultaneously) on tapering last Thursday, which had almost zero impact (see “ECB Reportedly Considering Slashing QE in Half in January, EURUSD Shrugs), Draghi’s minions have been busy again.

“Central bank officials familiar with the matter” told Bloomberg that some - presumably quite hawkish - ECB policy makers “see room for little more than 200 billion euros ($235 billion) of purchases under the institution’s bond-buying program next year.”  With said “officials” (who asked not to be named because the talks are not private anymore) seeing a limit to bond buying of 2.5 trillion euros under the current rules and purchases expected to reach 2.28 trillion by the end of 2017, we can do the calculation.

According to last week’s trial balloons, the ECB was looking at reducing its purchases from €60 billion euros to about €30 billion for at least nine months.

As we also explained in “How Will The ECB's QE Tapering Impact The Market? Here Are The Possible Scenarios”, the market neutral level of APP extension estimated by Citi appears to be around 250 billion Euros, or roughly €50 billion more than "some" ECB policymakers will permit. The three broadly market neutral scenarios laid out in Citi’s model were €20bn x 12mth, €30bn x 9mth and €40bn x 6mth as shown below.

For what it’s worth, Citi’s neutral scenario corresponded closely with a Reuters poll (from 11-14 September) which suggested the consensus amongst economists was for €40bn (range €30- 50bn) over 6mths (range 3-12mths).

And while we can argue about what the ECB should do to optimize conditions in the real economy, it now has a little problem vis-à-vis market expectations for the upcoming 26 October meeting. A 220 billion Euro extension is among the worst scenarios and, as Bloomberg confirmed “such a limit is at the lower end of volumes under discussion, setting the Governing Council up for a potentially difficult policy meeting.”

Citi previously noted that risks are skewed towards higher yields and bear-steepening due to issuer limit constraints. Following today’s trial balloon, HSBC commented that “The debate about the likely pace of QE continues to intensify in the run-up to the 26 October ECB meeting...If the ECB are correct then this would mean the pool of bonds would be used up beyond that point.”

Marc Ostwald, global strategist at ADM ISI in London, also commented on the ECB’s limited room to maneuver. “If they stick to the capital key, then there are only about 55 billion of Bunds that they could buy, which in turn caps what they can buy in total, especially with limits on what they can buy of smaller countries debt. However, they could reduce the relative proportion of govt bonds in a 30 billion euro per month QE pace to try and circumnavigate the problem…but even that will only be a marginal help.”

Bloomberg also notes that some policy makers are concerned about the reluctance of investors to sell their bonds “Reducing monthly buying to 25 billion Euros – which would total 225 billion euros over nine months – may address some of those concerns, the officials said.”

Perhaps the best tactic here is to release as many trial balloons beforehand, that 26 October becomes a non-event...


Ghordius Tue, 10/17/2017 - 05:07 Permalink

can't wait. the suspense is killing meoh, wait. that's not correct. I am only calling for the popcorn. it's megabank analysts that are fretting(made a bigger comment on all this on the previous ZH article, here link: Oct 17, 2017 4:53 AM )

Ghordius Tue, 10/17/2017 - 05:10 Permalink

"And while we can argue about what the ECB should do to optimize conditions in the real economy..."sure. all major central banks made the super-unprecedented moves of never-seen-before sizes and... the author talks about "optimization"the belief in micro-steering seems to be hard to shake off. meh

Easyp Tue, 10/17/2017 - 05:22 Permalink

This is all monopoly money created out of thin air by the ECB.  Germany the only EU economy that is doing well.  Greece is bust and the Bad Debt in Banks all over the EU enough to sink the Euro Project.  Although it will be painful Brexit is the right move in the long term.

AvoidingTaxation Tue, 10/17/2017 - 05:43 Permalink

At least the Swiss are flexible. They can print more, or let their currency appreciate. They printed 600B CHF in 7 years, making more on the side with global market rising as they have a 20% stock market allocation. Plus 100s of billions in developed market debt, .gov and corporate. Those bonds and shares generally also pay some 1-4% interest/dividend.With the EUR at 1.15 CHF they could also stop printing. Hence the next predictable global crash, when all CBs stop printing. Followed by a new, extrahuge, massive, unprecedented printing. Rinse repeat. Since 100s of years. 

J J Pettigrew Tue, 10/17/2017 - 06:30 Permalink

Central Planners "know" how to get in...spill the money....but they don't know, won't think of how their actions finalize....they don't know how to get out of the trade they put on....

nmewn Tue, 10/17/2017 - 06:48 Permalink

"Print moar dammit!" - Paul Krugman, Keynesian "socio-economics" professor and elitist contradictory "Liberal" opinion maker for the NYT's.Who owns a summer the Caribbean ;-)

Last of the Mi… Tue, 10/17/2017 - 07:06 Permalink

Call me when the QE spigot is disconnected and the banking parasites begin to shrivel and die. Other than that is's all rinse and repeat headlines again, which is where we've been for a long while now.

JailBanksters Tue, 10/17/2017 - 07:11 Permalink

The Phrase "QE to Infinity" was first coined way back in 2008, that's 9 years ago.They are still talking about QE, were they right or were they wrong.It appears that QE is now the Business Model for Central Banks. 

yogibear Tue, 10/17/2017 - 07:47 Permalink

Print, print, print with no consequences. It's a fantasy land to the central bankster's amazement is working.Banksters are transferring wealth while the 90% are oblivious. 

itstippy Tue, 10/17/2017 - 08:44 Permalink

What would happen if the ECB hit their official "debt limit"?  Great Googley Moogley!  Things would get very bad very quickly.  Is there some precedent around to help us figure out how to deal with such a situation?  Let's brainstorm some ideas.  The EU Central Bankers could:* Wring their hands in anguish as asset prices crumble and government bonds in many countries go bidless.  Gnash their teeth at their helplessness because they've hit their self-imposed "debt limit" and can no longer print to keep the game going.That's all I can think of.  Anyone else?