Hurdles for ECB QE

European Central bank has started its first ever targeted asset purchase programme from this month at €60 billion per month. The announcement has already altered the declining sentiment and triggered off massive flow of funds.

Nevertheless some issues remain to be concerned off about the programme -

Shortage of securities -

• € 10 billion at mac could be sent towards the asset backed securities and covered bonds that still leaves ECB with massive € 50 billion.
• Over the anticipation of the programme and since the announcement the take up has been huge in the market and these buyers all not will be a willful seller.
• The banks will not be interested in reducing their holdings as they would have to anyway park the money at ECB at -0.20 percent.
• Even issuance of new bonds may not be that large to cover.

Cost of the programme -

• European bond yields have dived deep into the negative territory. According to key ratio ECB would need to buy 18 percent of German securities where the govt yields are negative up to 6 years.
• Buying from foreigners due to lack of domestic sellers, ECB would also incur some currency cost.
• Notably 20 percent of the ECB purchase is on risk sharing basis that still could be significant.