21 Jan 2015
What to expect from Draghi’s speech tomorrow – BAML
FXStreet (Barcelona) - The Bank of America-Merrill Lynch Research Team lists their expectations from the ECB speech tomorrow.
Key Quotes
“An envelope for government bond buying of between €500bn and €700bn over 18 months with a monthly or quarterly pace for the purchases. All investment-grade government bonds could be part of the program – which maintains leverage over Greece.”
“Since changing the current default approach of mutualizing loss is institutionally challenging – it takes a qualified majority of 2/3 of the ECB capital – our baseline is that the program will be mutualized, but with a low level of confidence, since a “size vs risk-sharing” trade-off is quite possible.”
“A generic description of the distribution of the purchases across countries, which will be a combination of capital key and bond market size.”
“We would, however, expect the ECB to retain considerable discretion on the details of the purchases, e.g., on which maturities it would intervene. Benoit Coeure said that QE had to “take into account the diversity of the Euro area countries”. This calls, for instance, for intervening towards the long end of the curve in the constituencies where a large share of the curve is already in negative yields, while intervening across more segments of the curve where yields are still positive. We do believe, however, that the ECB should reserve the right of buying negative yielding assets.”
“In our baseline, the ECB will NOT opt for adding corporate bonds to the mix on top of government bonds. This market is already thriving, concentrated in core countries and has little “transmission power”. We do not completely exclude this possibility though, if the central bank wishes to give itself more credibility on the expansion of its overall balance sheet beyond the government bond buying.”
Key Quotes
“An envelope for government bond buying of between €500bn and €700bn over 18 months with a monthly or quarterly pace for the purchases. All investment-grade government bonds could be part of the program – which maintains leverage over Greece.”
“Since changing the current default approach of mutualizing loss is institutionally challenging – it takes a qualified majority of 2/3 of the ECB capital – our baseline is that the program will be mutualized, but with a low level of confidence, since a “size vs risk-sharing” trade-off is quite possible.”
“A generic description of the distribution of the purchases across countries, which will be a combination of capital key and bond market size.”
“We would, however, expect the ECB to retain considerable discretion on the details of the purchases, e.g., on which maturities it would intervene. Benoit Coeure said that QE had to “take into account the diversity of the Euro area countries”. This calls, for instance, for intervening towards the long end of the curve in the constituencies where a large share of the curve is already in negative yields, while intervening across more segments of the curve where yields are still positive. We do believe, however, that the ECB should reserve the right of buying negative yielding assets.”
“In our baseline, the ECB will NOT opt for adding corporate bonds to the mix on top of government bonds. This market is already thriving, concentrated in core countries and has little “transmission power”. We do not completely exclude this possibility though, if the central bank wishes to give itself more credibility on the expansion of its overall balance sheet beyond the government bond buying.”