Un'interessante analisi UniCredit, con focu Grecia E QE
Happy Sunday,
This is the last Sunday Wrap of the year, so let me start by thanking you all for all the conversations, discussions, comments, laughs and – most importantly – interest in our work during this fascinating, if at times tricky, year.
And talking about tricky: It’s been a week of just about the worst mayhem in global markets for some two years. I can only sit back and wonder why. After all, this pandemonium came on the heels of the US’ blockbuster 321,000 NFP on December 5 (the tenth reading in a row north of 200k) and a further oil price decline (now reaching a 5-year low, providing a massive positive wealth effect to households around the world as well as non-oil related businesses), and the ECB announcing a meager take up of the latest TLTRO (yes, confirming that there is not a lot of demand for credit, but we knew that because credit lags GDP – but increasing the probability of that further and broader asset purchase program the world seems to be yearning for.)
I acknowledge that a sovereign QE program by the ECB seems to have moved closer, but I remain less convinced that most – and if they do it, I remain a relative skeptic with respect to its impact.
So, let me dedicate this last Sunday Wrap of 2014 to that the topic of ECB sovereign QE:
■Will they or won’t they? – and which are the likely triggers (data) and/or obstacles (Greece; the ECJ)?
■and if they do, what will the effect be? – all in the FX?
1. Will they or won’t they? – still just about 50/50
Looking at the market and talking to our clients leave me no doubt that something like 99% of market participants expect the ECB to launch a sovereign QE program in early 2015. My gut feeling is that about 2/3 think it’ll happen in January, and the rest lean towards March.
I think the probability of sovereign QE is considerably lower than that. As we discussed in our new “2015 Outlook”, published last Tuesday, we think it’s much more like a 50/50 call. We do see an announcement of further private asset purchases in early 2015, but then to be followed by a sufficiently good recovery that will gradually turn down the volume on this presently deafening call for QE, eventually leaving the sovereign QE weapon on the shelf.
Yet, when seeing the poor take-up of the TLTRO this past week, and recalling the ECB’s pretty firm pledge to get their balance sheet to EUR 3 trillion, and seeing the 5yr/5yr at all time lows, I can’t help but wonder if the probability might now have tipped slightly in favor of sovereign QE.
If it comes, I think March is much more likely than January. We are all in the guessing game here, of course, but I remain convinced that the decision remains data dependent. If Tuesday’s PMIs improve broadly as expected (to 50.6 and 51.8 for the manufacturing and services PMIs), and if Thursday’s Ifo moves higher as well – particularly the business expectations component – then we probably have seen a more lasting turnaround in the Eurozone business cycle again. That, in turn, would mean that the January 22 meeting becomes a still lower probability for sovereign QE. The March 5 meeting also has the advantage that it’ll come with their new macro forecasts.
Beyond the data, there are obviously two elephants in the room: The Greek political mess and the ongoing considerations at the European Court of Justice with respect to the OMT program. Of course, neither of these two issues should play any role at all in the ECB’s decision on whether or not to employ an indisputably legal tool to fend off the risk of deflation and meet its mandate, but to think those issues are not in the room, nevertheless, seems naïve.
So let me give you my two cents worth on each of them:
1.1. Greece:
I assume that you are familiar with the issues of the presidential election which have been brought forward to this month (first attempt on Wednesday), the prospect of early parliamentary elections (probably by February) if they fail to elect a president by the third attempt (on December 29), and that the opinion polls show Syriza as Greece’s largest party. And you know that the local press thinks that the government can count around 170 MPs in favor of the government’s candidate, Dimas, short of the required 200 for the two first attempts, and also (less) short of the 180 needed for the third attempt on December 29.
Before getting to the ECB, let me note that while this is a serious situation, and one far from what one would have wanted to see, I think markets have gone too far in fearing the worst.
First, Samaras may indeed find another 10 MPs before December 29. Several MP, who are either independent or belong to one of the small parties, know that they are unlikely to be re-elected if elections are called, some of them losing not only their income and privileges, but also missing out on a pension. Second, even if denied by Samaras, the media reports that he may ditch Dimas after the first (or second) attempt and appoint Democratic Left leader, Kouvelis, instead do not seem that far-fetched to me – and, assuming that he would accept the nomination, Kouvelis would almost certainly come with his 10 MPs! Or, in the best of Greek traditions, Samaras may have something else up his sleeve; moving the presidential election forward was certainly a clever move by someone who obviously is not ready to step down quite yet.
But even if we get early elections, it is not a given that Syriza will become the biggest party and scoop the 50 bonus seats. Two just released polls have cut their lead from about 5% to 2.8% and 3.6%. As reality sets in and the campaign gets going, further erosion seems possible for the party of the untested “big promises” just as growth is returning. There is certainly no realistic chance that Syriza will get an absolute majority, but let’s assume they do win, and scoop the 50 bonus seats, which will land them in the driver’s seat. Tsipras will then need to find one of several coalition partners. But when doing so, he’ll need to choose which of the several factions inside Syriza he’ll rely on – and only the most moderate factions stand for things that can be agreed on in a coalition.
Admittedly, even the moderate factions are pushing a policy agenda that I find inconsistent, e.g. their pledge to raise public sector salaries (surprise: this is where a lot of their voters seem to be) with a far-from less clear funding plan. This, along with Greece’s EUR 16.6 bn 2015 redemptions, taking total funding needs beyond EUR 20bn next year, has raised speculation in the market of another debt rescheduling. But Greece’s creditors are now European governments and the IMF, and only to a very minor extent the private sector, so this question will be squarely with Brussels and Washington – and PSI is far from obvious, given the relative sizes and complexities.
Syriza has been talking to the rest of Europe for several months now, and while I don’t want to dismiss the political divide (it is there, and on the political level it’s significant), the vibes I hear are most frequently along the lines of “we probably can do business with these people.” Of course, with only a few weeks to get an agreement with the troika, things will be tricky. But between a Europe, which is not really in a political fighting mood anymore, and a fragile new Greek coalition, I could see a few band-aids and bridging arrangements to keep the boat afloat.
That said, I see significant trouble for Tsipras in holding Syriza together through this process and hence for long, if in power. So here is my prediction: If we do get early elections around February, and if we get a Syriza-led coalition government, then it’ll be less troublesome than most people presently think, and it’ll survive only to the end of the year. Beyond that, the situation is more uncertain, but – as Edoardo Campanella and I discussed in the note on Europe’s politics I attached last Sunday – while a disaster scenario is a possibility, I fail to see it as a probability at par with present pricing in markets.
So what does the ECB do about Greece if they decide to launch sovereign QE? They have already said that they’ll buy all EMU sovereigns according to their capital key in the ECB, but would that include a sub-investment grade country either with no government or with a government led by one of Europe’s new and non-Brussels-consensus parties?
Personally, I think they should buy all sovereigns because the QE is about Eurozone inflation, which should not be made a policy-conditional topic. That said, as Marco Valli has pointed out to me, they have probably already told us that they disagree with my logic: Since they already exclude (in their existing private asset purchases, aimed at the same as sovereign QE) assets from a country which government is sub-investment and non-compliant, then I think it is only reasonable to expect them to exclude the same sovereigns in a sovereign QE program. Political reality over economic logic.
1.2. The European Court of Justice:
The ECJ’s Advocate General will give his opinion on the OMT program on January 14, and the ECJ will follow with its ruling most likely in summer. In the past, the ECJ often followed the Advocate General’s opinion, but not always. And, importantly, the OMT is a different animal from a sovereign QE program – yet, the quacks of those two ducks do sound awfully similar.
My point is this: Even if they are different ducks, if (against expectations) the Advocate General on January 14 were to argue that the OMT violates EU law, it would put the ECB in a difficult position - and launching sovereign QE just weeks later would no doubt be seen as a serious provocation in several parts of Europe.
Of course, as Andreas Rees argues, you could also reason the other way around: A negative surprise on January 14 would surely cause considerable market turmoil, which – via inevitable sell-off in the periphery – would equate to a monetary tightening and therefore raise the need for QE. In that case, better to get it launched before the ECJ rules. And, of course, since one of the key arguments against the OMT was its policy conditionality (“therefore it is not monetary policy”, as the Bundesbank’s argument went), the ECB could unleash its QE with a clear declaration that it comes with no policy conditionality! (Hey Greece, your lucky day…)
2. And if they go, what would the effect be?
The short answer is that I don’t know what the effect on growth (and hence on inflation down the road) would be, but in itself, it’ll probably be very limited – unless it drives the euro a lot weaker, which it may, or may not do. In other words, if you imagined QE in the Eurozone of any realistic magnitude, but if you know in advance that the euro will not move, would you expect a measurably positive effect on the general macro picture? I am far from sure!
And here is the real issue: If the ultimate – if never articulated - objective is to weaken the exchange rate, they really ought to consider some version of direct FX interventions, rather than their own government’s euro-denominated sovereign bonds (and then hope for a magic spill-through to the euro), but alas, FX interventions, or anything that only half-way quacks like that duck, are all off limit.
So, let’s assume they announce a EUR 500bn sovereign QE program with promises of expanding the program as much as is needed. (The latter bit is a very important part of the statement, because without it, I seriously worry that it’ll be “buy the rumor, sell the fact”.)
The immediate effect will of course be a rally in sovereigns – or will it? Looking at the experience in the US and UK leaves me far less than convinced about the effect of implementation of a well-announced program. Of course, you must never take the weapon off the shelf, but leave the threat there until nobody talks about it anymore.
So the issue is what the sellers of govies to the ECB do with the cash? A lot of the selling would no doubt come from the banks, but they still have no measurable demand for loans and they remain tied down by regulations on what they can do with their liquidity.
As a result, I wouldn’t be surprised if you saw an increase in deposits at the ECB … at negative rates, because there is no other place to park the liquidity. Needless to say, this – the much demanded sovereign QE program - would thus implicitly impose yet another tax on the banking system, which is just about the last thing you want at this stage. The logic is that the ECB should bring the deposit rate back to at least zero in the same move, but the signaling effect of that could be odd. But without this correction, I worry that the negative side-effect of QE would be large compared with whatever positive effect you can find from the wealth effect of a few non-super-regulated and not-super-risk-adverse “govie-sellers” moving into equities or credits.
So you hope that the euro will increasingly become the funding currency for EM trades (!) and that sort of thing, driving it weaker – in spite of the Eurozone’s large current account surplus.
Yes, you may see EUR/USD still lower (as everybody forecasts), but it may continue to be much more of a “stronger dollar” story than a “weaker euro” story. While EUR/USD is not that far off its pre- “whatever-it-takes speech” of about 1.21 in mid-2012, the trade-weighted euro has gone participated in this latest leg down, as illustrated in the chart below.
So here is the question: How do you weaken the euro against the yen, the ruble, the Scandies and the Central Europeans? Not that easy. And without a sizable trade-weighted euro depreciation, how do you get a measurable effect from the central bank buying govies in an overwhelmingly bank-credit-intermediating economy (while those banks have been tied up in front of a multi-barrelled shotgun of additional capital requirements, supervision oversight and higher taxes)?
I am coming back to my long-held view: We are asking – and expecting - way too much of the central bank. Alas, when political leadership is weak, it falls on others to try and do the job, even if their toolbox is not really fit for purpose.
You have heard me say this before: What about a solid public investment program? It leaves the detailed decision with elected officials, it stimulates demand directly for people who need a job, and it builds long-term potential output - and if you don’t like the short-term effect on debt, well then have the ECB buy that amount of debt and keep it… Time to be a bit innovative!
Unfortunately, there is not much of a chance of this in meaningful size in the foreseeable future – and ‘til then, maybe, after all, we are so much better off if Draghi just keeps on talking and threatening big actions until things get better (and they always do), and our governments eventually lay out a serious vision how to make Europe truly competitive via a big investment program!
I wish everyone a great holiday season and best of luck in 2015. I look forward to an exciting year – and to hopefully plenty of discussions of how to make a proper return.
Best
Erik
