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14 October 2015

Bloomberg: It's Quantitative Easing, Europe, But Not as We've Known It

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The European Central Bank has started a limited pilot program to test out buying bonds through auctions rather than approaching dealers one to one. Strategists say the system is designed to improve QE’s transparency and may eventually be rolled out across the euro region.

Two of the three central banks testing the new process on behalf of the 19 member states said they’ll release details of the securities to be acquired before they approach owners. Banque de France already published its first shopping list on Tuesday ahead of an auction later this week. [...]

The pilot program uses reverse auctions, where potential sellers compete to undercut one another on price. The Fed used a similar system for its QE program. The ECB announced the trial on Oct. 5, saying it would be carried out “without prejudging in any way whether the Eurosystem would consider applying auctions more systematically.”

The French central bank published a list of ISINs, or International Securities Identification Numbers, ahead of its Oct. 16 auction, while the Dutch have pledged to do the same before their first purchases next week. The two banks said the Bloomberg auction system will be used to carry out the process.

‘Smoother’ Process

“Higher transparency of the purchases is expected to encourage deepening of the securities market, as well as contribute to its smoother functioning,” Lithuania’s central bank, the third participant in the trials, said in a statement. It held the first reverse auction on Tuesday, said Mindaugas Vaiciulis, head of the market operations department.

The method will become “the norm” across the euro region, Antoine Bouvet, a London-based rates strategist at Mizuho International Plc, said in a note last week.

Others aren’t so sure.

Unlike the Fed, the ECB is hampered by not having a single debt market, according to Commerzbank AG, the biggest primary dealer in German government bonds. There are also limits on what euro-zone central banks can purchase, from not owning too much of a single issue to being prevented from buying securities yielding less than the ECB’s deposit rate.

“Reverse auctions can increase transparency, however they do reduce flexibility on behalf of the euro system, and this will probably make it challenging to implement this for the entire QE program,” said Christoph Rieger, Commerzbank’s head of fixed-income research in Frankfurt. “There’s already a challenge to figure out where to buy, given the various restraints they have.”

Full article in Bloomberg

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