Today the ECB’s governing council unveiled an expanded plan for asset purchases. Also known as Quantitative Easing (QE), the ECB’s program consists of:
- A total of 1.1 trillion euro’s for expanded asset purchases of eligible securities
- $45 billion euros in monthly purchases of sovereign debt
- $5 billion euros of institutional and agency bonds
- $10 billion euros of existing asset purchase programs
The ECB’s program is different than the FOMC’s past QE owing to the ECB’s unique structure. The ECB is composed of individual National Central Banks (NCB’s). Under the new QE program, the ECB will only share risk in 20% of the asset purchases. The remaining 80% of the risk will be born collectively by the NCB’s.
It is likely that this risk sharing system was created to assuage German fears that QE purchases could be used as a source of funding from profligate eurozone governments. Placing the NCB’s at risk is meant to force them to exercise prudence and not be pressured by their national governments to finance their deficits.
The ECB also announced a change in the pricing structure of their TLTRO program, bringing down the refinancing rate to match that of the existing MRO facilities. This removes a 10 bp premium over the MRO rate.
Mario Draghi also mentioned that under the proposed QE program, the ECB would limit its purchases to:
- no more than 25% of each bond issue and
- no more than 33% of each issuer’s total bond issuance
This contrasts with the FOMC’s QE programs, where at one point the Fed owned over 40% of treasuries over 5 year maturity and up to 2/3 of some individual bond issues.
Predictably, the QE announcement sent European bonds to the moon and cratered the EURUSD exchange rate, with futures finishing the day around 1.1368:
Categories: Monetary Policy