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ECB pours cash into company bonds to boost eurozone

ECB pours cash into company bonds to boost eurozone

3 min. 08.06.2016 From our online archive
The European Central Bank on Wednesday took the unprecedented step of buying corporate bonds, its latest weapon in a desperate battle to kick-start sluggish growth and inflation in the eurozone.

(AFP) The European Central Bank on Wednesday took the unprecedented step of buying corporate bonds, its latest weapon in a desperate battle to kick-start sluggish growth and inflation in the eurozone.

Having already slashed interest rates to below zero and pumped massive amounts of cash into financial markets, it started to directly finance businesses by buying their debt in the bond market.

In the first major trades, the ECB bought millions of euros worth of bonds of French power company Engie and Spain's Telefonica, reported the Bloomberg financial news wire, citing unnamed market players.

Other purchases were of debt issued by brewer Anheuser-Busch InBev, German engineering giant Siemens, Italian insurer Assicurazioni Generali and French automaker Renault, Bloomberg said.

ECB chief Mario Draghi hopes the scheme -- set to be worth billions of euros every month -- will deliver the financial medicine directly where it is needed, with Europe's major public corporations.

The Frankfurt-based bank wants companies to use the extra cash to boost investment, creating jobs and growth in the flagging 19-country currency bloc.

With prices currently falling, the ECB hopes to boost activity and raise inflation back to close to two percent, a level it deems healthy for growth.

Critics however charge that the ECB is overstepping its mandate by lavishing billions on corporate giants and say it could be distorting markets and creating bubbles.

Some also fear that large companies -- which already have access to cheap money thanks to rock-bottom interest rates -- could be tempted to use the extra liquidity for risky merger and take-over gambles.

Billions per month

To kick-start lending in the bloc, the ECB has already made unprecedented amounts of ultra-cheap loans available to banks on condition they pass it on as credit for businesses and households.

The ECB has also embarked on a major asset purchase programme known as quantitative easing, or QE.

It has beefed up that scheme from 60 billion to 80 billion euros ($68 billion to $91 billion) a month until March 2017, with part of the extra money earmarked for the new corporate bond purchases.

Under the so-called corporate sector purchase programme, or CSPP, the central bank will buy euro-denominated, investment grade corporate bonds that mature within six months to 30 years.

Many analysts are betting on a monthly volume of five to 10 billion euros, while Germany's Commerzbank expects just three to five billion euros in the long term.

The ECB is making the purchases through the national banks of Belgium, Finland, France, Germany, Italy and Spain.

These six national central banks will publish lists of bonds they hold on a weekly basis, starting Monday July 18, without revealing the exact amounts of their holdings.

The ECB has said it won't buy bonds issued by banks or bank subsidiaries -- but it can buy bonds of, for instance, a car company such as Volkswagen that operates an 'internal bank'.

The eurozone central bank has also said it will be able to hold on to bonds even if the companies' ratings are downgraded to sub-investment grade, so-called "fallen angels".

'Little impact'

The market for corporate bonds is far smaller than for sovereign bonds or for stocks. European businesses rely mainly on bank loans rather than bonds to raise capital.

The total volume of eligible bonds is estimated at 500-700 billion euros.

Companies have issued a flurry of bonds since Draghi announced in March that the ECB would intervene in the corporate bond market, a first on this scale for a large central bank.

Early spring saw the biggest euro-denominated corporate bond issue of all time by AB Inbev, worth more than 13 billion euros, while US companies like FedEx and IBM have issued bonds through their European subsidiaries.

Capital Economics said that, despite the initial spike in bond issuance, there was unlikely to be a major long-term impact on inflation and growth.

Despite all the cheap money already available to them, companies have refrained from boosting their investment so far, wrote its Europe economist Jack Allen.

"Demand is still subdued and there is a large amount of spare capacity in the economy, so firms are unlikely to feel a strong need to increase investment," he wrote.

"The upshot is that while the ECB's corporate bond purchases seem to have had a positive effect so far, they are unlikely to materially impact the outlook for economic growth and inflation."