(MENAFN - Gulf Times) As if Mario Draghi doesn't have enough problems already. Europe is trying to avert a crippling bout of deflation. Germany wants austerity and less stimulus. And Greece is demanding to renegotiate the terms of its bailout, a move that has revived the risk of the euro area splintering.
Now, there's yet another: the European Central Bank president's unprecedented plan to jolt the eurozone out of its economic malaise by buying ‚¬1.1tn ($1.3tn) of bonds may be hamstrung, even before it starts.
The reason? A dearth of new supply and a lack of willing sellers. Morgan Stanley estimates net issuance from governments will be negative for the first time, once the ECB's plan is taken into account. The resulting scarcity makes hoarding of the safest euro-area securities by banks, insurers and pension funds all but inevitable, hindering ECB efforts to buy in 19 months roughly the same proportion of those bonds as the Federal Reserve accumulated in almost six years of Treasuries purchases.
"If it becomes at all clear that the ECB is struggling to buy a sufficient quantity of bonds, it makes it even less likely that anybody will want to sell," said Michael Riddell, a money manager at M&G Group Plc, who also said he'd been telling clients the ECB may have difficulty with its purchases. "This would scupper their attempts to boost inflation," he said. London-based M&G oversees the equivalent of $395bn.
The programme has been carefully calibrated to take account of the size of different markets, an ECB spokesman said by e- mail on Monday. The central bank is not at all worried about its success, and operational details will be regularly reassessed, the spokesman said.
While the ECB faces economic risks akin to those in the US when the Fed started quantitative easing, global debt trading has evolved. A tighter balance between supply and demand has pushed up prices, helping send rates in Europe to record lows and leaving ‚¬1.2tn of the region's sovereign bonds yielding less than zero. That may make holders of the securities more reluctant to sell.
"We have institutional investors, which are desperately looking for yield," said Franck Dixmier, chief investment officer for fixed income in Europe at Allianz Global Investors, a unit of Europe's biggest insurer. "They will not sell. Because what really matters for a pension fund or an insurance company is the yield at the time you purchase the bond - and there's the question of reinvestment for those investors." Of the ECB's ‚¬60bn monthly plan, about ‚¬45bn probably would be sovereign debt, a central bank official said January 22. That implies an intention to purchase 14% of euro-area government bonds outstanding by September 2016, or 18% of securities from Finland, Germany, Luxembourg and the Netherlands, the only nations with two or more AAA ratings from the three major credit-assessment companies.
It took the Fed almost six years, and three rounds of quantitative easing, to boost its holdings to about 20% of US Treasuries. The Bank of England owns about 31% of Britain's gilts and the Bank of Japan is still adding to holdings of that nation's debt. Together, those purchases are crimping the amount of securities worldwide that are available for trading.
Reduced government spending is likewise contributing to a global dearth of sovereign debt. Germany is due to curb the amount of conventional bonds outstanding by ‚¬8bn this year. In Spain, where Prime Minister Mariano Rajoy's People's Party has implemented the deepest austerity measures in the nation's democratic history, the net issuance target for 2015 is ‚¬55bn, down from net sales of ‚¬97bn in 2012. Including ECB buying, net issuance of euro-area sovereign bonds will decrease by ‚¬259bn in 2015, Morgan Stanley strategists, including London-based Neil McLeish, Anthony O'Brien and Serena Tang, forecast in a February 9 note. The ECB may struggle to find sellers, leaving its target in jeopardy, the US bank's Maggie Chidothe and Anton Heese wrote in a February 13 report.
Draghi's competition for purchases may come from banks requiring bonds to meet regulatory rules, pension funds who need to match their liabilities, passive investors who track debt indexes and other central banks, which buy European securities as part of their balance-sheet management.
Demand for debt securities globally will outstrip supply by about $400bn in 2015, according to data compiled by JPMorgan Chase & Co last year.
"We have no interest in selling parts of our portfolios to the ECB when QE starts," said Francisco J Simon, a money manager at Santander Asset Management Espana in Madrid, which oversees ‚¬14bn in fixed-income funds. "Instead, we'll keep managing funds based on how we see interest rates evolving. That means, should we foresee interest rates declining, we would even increase our exposure" to Spanish debt, he said.
The ECB can draw encouragement from the trillions of dollars of bonds successfully bought by the Fed, BoE and BoJ. It may be ready to pay higher prices for the securities in order to meet its goal of pumping money into the euro area's financial system. ECB Governing Council member Jens Weidmann said February 12 that he is "confident that we'll manage to reach the volumes we announced," for the plan. The programme will have its greatest effect by encouraging investors to shift funds into riskier assets, such as loans to companies and households, Executive Board member Peter Praet said the same day.
"Presumably they'll have to bid aggressively," said Johannes Mueller, the Frankfurt-based chief investment officer for Germany at Deutsche Asset & Wealth Management, which oversees the equivalent of about $1.2tn. "Depending on where prices are, alternatives start to look attractive. We don't buy into the theory that there's going to be a shortage of sovereign bonds."
The ECB announced its debt-purchase plan on January 22 to counter the threat of a deflationary spiral by pushing more cash into circulation. Buying will continue until its satisfied inflation is back in line with its target.Consumer prices in the euro region fell an annual 0.6% last month, according to a January 30 report, matching the fastest decline on record. Tumbling commodity prices dragged down the rate, which has been less than half the ECB's goal of just below 2% for more than a year.
Greek markets have slumped since January's election of the anti-austerity Syriza party, reviving memories of the debt crisis that ravaged the region and pushed the nation into the biggest restructuring on record in 2012.