- ECB outlines corporate bonds purchases;
- LVMH, Kering, Unilever, Nestle, Repsol and Shell are among the bonds purchased over the last year;
- Pressure to end QE could increase
The European Central Bank published a report for the first time on Monday of its corporate bond purchases, as it comes under pressure to taper its buying program.
"When the ECB buys bonds in the primary market it is essentially taking the place of some other investor who would have bought the bonds but cannot because the ECB bought them instead. That other investor still has money that it wants to invest but no more Apple or MacDonald's (as an example) bonds to buy. So they have to use that money for some other investment. That is how the ECB pushes liquidity into the economy," Erik Jones, professor of International Political Economy at Johns Hopkins University, told CNBC via email.
The ECB decided to purchase corporate bonds in March 2016 as part of its quantitative easing (QE) program to overcome the scarcity of government bonds. Monday's released data showed that LVMH, Kering, Unilever, Nestle, Repsol and Shell are among the bonds purchased over the last year or so.
These 'non-standard policies' have helped reduce sovereign and credit risk, curtail funding fragmentation, improve liquidity and increase asset prices. One of the most powerful channels through which QE has worked is a weaker currency, which has boosted the competitiveness of the euro zone," Shweta Singh, senior economist at TS Lombard, told CNBC via email.
However, analysts believe that the ECB's decision to detail their corporate bonds purchases will affect its quantitative easing program. Even though the information is already available, the fact that the name of the company, its international securities identification number, the maturity date and the coupon rate of the bond will be available in one place will help to better assess the trends in the corporate debt market, especially for investment grade debt.
"The debate is already shifting towards the diminishing benefits of ECB QE and the rising risks of side-effects and market distortions, especially against the backdrop of healthy euro zone recovery and increasing scarcity of assets to buy. The CSPP (corporate sector purchase program) disclosure details reflects this shift," Singh from TS Lombard noted.
Jones from Johns Hopkins University made the same point. "I think this disclosure will attract attention to QE at a time when people are already asking how long the program can and should continue. It will also attract controversy because of the appearance and reality that the program distributes benefits to specific corporations that issue bonds."
The ECB said that in its latest economic bulletin that corporate bonds purchases are "deliberately broad and its composition is primarily guided by monetary policy and risk management considerations." It added that the central bank "aims for a market-neutral implementation" of the stimulus program.
"Of course the ECB will argue that the broader implication of the program is to improve financing conditions for all firms, including those that do not rely on private capital markets for their liquidity requirements. Nevertheless, the perception that the ECB is picking winners will be hard to dismiss," Jones claimed.
He added: "This will not spell an end to the QE program but it will provide fodder for those who want to argue that the program should be wound up as soon as possible."
In Germany, for example, there's been many calls to end QE so the low interest rate environment stops hurting German banks in detriment of supporting peripheral lenders.