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Quo vadis, ECB?

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It’s now the turn of the ECB tomorrow to debate whether they will or can taper their bond purchases.

The ECB are buying roughly EUR 80bn per month partly under its Pandemic Emergency Purchase Programme (PEPP). It’s already stated that the PEPP will continue to March next year with the usual caveats of being able to ‘tweak’ amounts in order to “maintain favourable financing conditions”.

Tomorrow we are very unlikely to see any change to the current -0.5% interest rate but behind the scenes there is likely to be heated discussions on the PEPP. The Fed last month walked away from any near-term decision on tapering. In Europe consensus is a lot more difficult. The German Centre for European Economic Research (ZEW) this week published a paper effectively claiming that the high debt countries are exploiting QE to bail out their Governments and hence in violation of the treaty.

Germany has inflation rising at 3.9% YOY, which into an election later this month is increasing the stakes. Already we are reading that German demand for gold bullion/coins is increasing. We could be seeing the conditions set up again for a North vs South political issue.

German CPI


(source: Bloomberg / Banque Heritage)

Nothing has changed since the debt crisis of 2012/2013. Indeed, Debt to GDP in most countries has increased (e.g. Italian Debt/GDP is +160%!). The ECB have, in effect, been buying Italian/Spanish and friends bonds and supporting these governments with cheap, arguably artificially cheap, financing. It cannot walk away or the market will re-price.

Italian (white line), Spanish (blue line), Portuguese (red line) and French (green line) Debt to GDP(%)


(source: Bloomberg / Banque Heritage)

That would be an issue for the EURO and therefore the USD. Most likely the PEPP will continue but the rhetoric perhaps will be a little more hawkish for the benefit of Northern leaders.

September 08, 2021

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