THE EUROPEAN Central Bank (ECB) accidentally performed €9.5bn (£8.1bn) of quantitative easing last week because it was unable to persuade banks to deposit enough funds with it to make up for its bond purchases.
The incident is a stark signal that the Bank could be reaching the “technical limit” of its ability to buy bonds in order to keep a cap on sovereign yields, says Raoul Ruparel, an economist for Open Europe.
Economists have in the past suggested there could be a limit on the capacity of the bond-buying programme due to a lack of available deposits the Bank can take in to make up for the impact of its spending on the Eurozone’s money supply.
The ECB has now bought €203.5bn of bonds issued by Eurozone governments, but is only holding an extra €194.2bn in deposits to make up for it.
Usually, the ECB “sterilises” its bond purchases by bringing in more weekly deposits from banks looking to store cash somewhere safe.
But the fact that its sterilisation failed last week suggests that banks are unable or unwilling to increase their deposits with the Bank, probably because they want to hang onto the extra liquidity as a cushion against market shocks.
Economists will keenly watch next week’s figures, released on Monday, to see if the ECB is able to get the programme back on course.
If not, it could precipitate a political crisis. “At that point it is likely that the ECB and Germany will have to make a fundamental decision over whether to either continue the bond purchases, abandoning their core monetary principles, or stick to their guns and wind down the purchase programme altogether,” says Open Europe’s Ruparel.
Meanwhile, Eurozone finance ministers last night agreed on the technical details of their bailout fund, the European Financial Stability Facility (EFSF), but the chief of the fund, Klaus Regling, admitted that there would not be significant investor interest in the coming weeks.
“We do not expect investors to commit large amounts of money in the next few days or weeks. Leverage is a process over time,” he said. In October, Eurozone ministers had said its €250bn in available cash would be leveraged to four or five times. That now looks optimistic in the light of little investor interest.
Eurogroup chairman Jean-Claude Juncker also said the IMF’s resources would be beefed up so that it could match the EFSF’s firepower. And the Eurozone agreed to pay out Greece’s €11bn aid instalment.