Tuesday, 17 July 2018

The ECB and QE "modalities"

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Shah: Watch for more ECB sourced stories…

The Dutch newspaper Het Financieele Dagblad reports that the ECB could choose from three possible options for QE on Jan 22:

1) buy government bonds based on capital keys

2) only buy AAA rated paper that includes loans and

3) NCBs buy their country government bonds based on capital key.

The paper, citing sources familiar with the deliberations, echoes what ECB’s Praet said to Boersen-Zeitung last week.

Our take-away is that:

1) the debate has shifted toward the mechanism/modalities of QE

2) there is a desire to show that QE is not adding a new layer of risk by getting NCBs to hold the risk, and

3) the prospect that QE could be pre-announced on January 22 but will be short on details.

The latter would reflect the degree to which QE is now fully priced by eurozone bond markets and the dangers of a sharp reversal if there is no QE announcement.

The advantage of leaving out QE details on January 22 is that it would allow the ECB to modify the programme based on the results of the Greek election on January 25.

We are likely to get more sourced stories related to the modalities of QE as the ECB will want to make sure that it is positively received by markets and politicians.

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